The economy's January air pocket
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The good news about the U.S. economy in January is that inflation was subdued and Americans were making more money. The bad news is that people weren't interested in spending it.
Why it matters: The latest data on the state of the economy as President Trump took office is further evidence that there was something of an air pocket in spending and confidence to start the year.
- It's a warning about consumers' wariness as the administration undertakes an aggressive economic agenda.
The intrigue: The Atlanta Fed's GDPNow, an estimate of GDP growth based on incoming data, fell to negative 1.5% for Q1 after incorporating Friday morning's releases.
- That includes preliminary trade data showing a record surge of goods imported into the U.S. — a sign of businesses bringing things in early to get ahead of the administration's tariff threats. Rising imports are a drag on GDP.
- Before Friday's data, GDPNow was comfortably in positive territory, at +2.3%.
What they're saying: "The data indicates that consumers were saving more in January, which aligns with the rise in economic pessimism we've seen in recent sentiment data," NerdWallet senior economist Elizabeth Renter wrote in a note.
- "People are feeling uncertain about the near-future economy, and are spending a bit more cautiously," Renter added.
By the numbers: The Consumer Price Index released earlier this month indicated the inflation last month was hotter than expected. The Personal Consumption Expenditures Price Index — the inflation measure preferred by the Federal Reserve — was more encouraging, as economists expected.
- In the year through January, the PCE increased 2.5% — cooling for the first time since September.
- Core PCE, which excludes energy and food costs, rose 2.6%, the slowest pace since 2021. On a three-month annualized basis, core PCE held at 2.4%, still higher than the Fed's 2% target.
Between the lines: Personal income sped ahead of inflation in January, increasing 0.9% (or 0.6%, adjusted for inflation). That surge was primarily led by the cost-of-living adjustment for Social Security benefits, along with healthy compensation growth and a boost from interest and dividend payouts.
- Meanwhile, consumption expenditures fell 0.2%, the first decline in monthly spending since March 2023.
- That resulted in a sharp rise in the savings rate, which increased to 4.6% from 3.5% in December.
Yes, but: Consumer spending is the bedrock of the economy, and one month of data doesn't mean the cracks are here to stay.
- Isolated events, like the cold front and the Los Angeles wildfires, likely dented spending.
"The recent slump in consumer confidence suggests some of January's drop in spending was due to fears of the impact of tariffs, [Department of Government Efficiency] cuts and deportations," Comerica chief economist Bill Adams wrote in a client note.
- "But winter weather also likely delayed a lot of nonessential spending, which should rebound in February with less disruptive weather. January's robust increase in incomes also suggests spending growth should recover near-term."
