The latest consumption numbers show that personal consumption expenditures have remained steady and that goods consumption is keeping pace with services. Perhaps more striking is the extent to which real disposable personal income and personal savings have turned up again. We look at why.

In Focus - Spending Money

Consumers are still spending and still spending on goods.
According to the Bureau of Economic Analysis’ Personal Income and Outlays report for January, real personal consumption expenditures (PCE) rose by 1.1% in the month. That followed two straight months of declines. The rebound in January put real PCE back above where it was in October. It also served as a useful reminder to be wary of reading too much into any given monthly movement.

Whereas services consumption had risen or been flat in recent months, goods consumption was responsible for the drops of November and December. In January, goods consumption grew by 2.2%, outpacing the 0.6% for services and almost entirely offsetting the drops in the Fall months.

If we zoom out from the shorter-term movements and look over the last six months, taking annualized growth rates, real PCE grew at a 3.1% pace, services at a 3.9% pace, and goods at a 1.6% pace. Distinguishing between durable goods (those meant to last three years or more) and nondurables, the perplexingly-strong growth in durables continued, with a 5.3% annualized increase; for goods that are to last a long time, one might have thought that a surge of the sort we’ve seen would be followed by a dip. Nondurables declined at a 0.5% pace.

And now we get to the subject of this week’s chart: how are consumers financing all this consumption? The chart goes back to a bit before the pandemic’s onset and the top, dark line shows real disposable personal income. We see a key reason why we had a goods consumption boom lifting the US out of the pandemic-induced recession-income grew in the midst of a recession and beyond, driven heavily by government transfers (the lighter blue line, deflated by the PCE deflator).

That’s old news. After the government infusion of spring 2021, transfers abated and so did personal income and goods consumption (not shown in graph). Some of those government transfers had been saved, but real personal savings started receding as well.

All the while, real compensation-the money and benefits people earned from jobs-had been growing at a fairly steady pace, a 3.5% rate from July 2020 to January 2023. That steady gain, however, was overwhelmed by the dropoff in government transfers, which fell by 7.4% from September 2021 to September 2022, when they bottomed out.

Since that low point, transfers grew by 1.4% to January. Combined with the increase in compensation, this helped disposable personal income turn around. From its peak in March 2021, real disposable personal income fell 22.1% to a trough in June of 2022. Since then, though, it has grown by 4.0%, or at a 6.9% annualized rate. Real personal savings also bottomed out in June, but grew by 78.0% to January, from its low base.

Coming out of the pandemic recession and the strong fiscal policy response, there was concern that consumption would decline as the money ran out, potentially paving the way to a recession. The most recent numbers show real disposable income and savings growing at a healthy clip. Maybe consumers can afford to keep shopping a little longer.

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Latest Flexport Metrics & Research

We take a preliminary look at the evidence of trouble in U.S. consumer credit following the New York Fed’s latest quarterly report on consumer credit.

Tune in on Thursday, March 2, for a State of Trade webinar on “Transatlantic Trade Relations,” including questions about why we don’t have a free trade agreement between the U.S. and EU, with guest expert Peter Chase of the German Marshall Fund.

Economic Developments

Both the headline and core Personal Consumption Expenditure (PCE) annual inflation numbers blipped up in January, from 5.3% to 5.4% and from 4.6% to 4.7%, respectively. An influential variant of these numbers, annual Trimmed Mean PCE inflation, fell from 4.7% to 4.6%, but the month-over-month increase, at a 6.3% annualized rate, was the highest since June of last year. Over the past year in the broader PCE inflation measures, services inflation has outpaced goods inflation, 5.7% to 4.7%. None of this signals a rapid return to the Fed’s 2% inflation target.

The Bureau of Economic Analysis (BEA) revised its initial estimate for U.S. real GDP in Q4 2022 downward by 0.2pp to 2.7% due to lower consumer spending and higher imports than the initial data suggested. A less volatile measure of economic activity, final sales to private domestic purchasers, grew at only a 0.1% rate in Q4.

Headline Euro area inflation fell to 8.6% in January, down from 9.2% in December. Euro area annual core inflation, however, which excludes food and energy, rose slightly to 5.3%, up from 5.2% in December and 5.0% in November. Energy prices, which are watched by the European Central Bank (ECB), continued to rise but at a slowing rate, down to 18.9% in January from 25.5% in December and from 41.1% in October.

The World Trade Organization (WTO) pointed out that, despite the conflict in Ukraine and the disruptions it caused, global merchandise trade is estimated to have grown 3.5% in 2022, 0.5% higher than its forecast from October last year. The WTO currently forecasts only 1.0% growth in merchandise trade in 2023.

Mortgage rates are climbing, with the 30-year fixed-rate at 6.50%, versus 3.89% a year ago, and the 15-year fixed rate at 5.51%, versus 3.14% a year ago. Meanwhile, existing home sales declined for the twelfth straight month and new mortgage applications fell 13.3% in one week to the lowest they’ve been since 1995. This not only represents a practical tightening of financial conditions, but also reduces demand for goods such as furniture and appliances.

The latest flash PMI for the G4-U.S., Japan, Euro area and the UK-stood at 51.3 in February for the headline composite output index, the first time the figure rose about 50.0 since last June (any number above 50 suggests expansion). The report notes that factory input cost inflation is at a 27-month low.

Political Developments

The U.S. announced new tariffs on Russian imports, mainly minerals and metals, most prominently aluminum, which will now face a 200% duty. All told, the tariffs will cover $2.8 billion worth of Russian imports to the U.S. This move is part of a number of moves taken by the Biden administration against Russia to mark one year since the conflict in Ukraine began.

The G20 meeting of finance ministers and central bankers ended without a joint communique as certain members rejected including geopolitical and security matters, such as the conflict in Ukraine and the use of nuclear weapons, in a meeting meant to address economic and financial conditions. The G20 was among the most prominent forums for international coordination during the Global Financial Crisis and the pandemic. That members can’t paper over their differences for the sake of issuing a communique bodes ill for continued coordination and cooperation.

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