The latest data on US Personal Income and Outlays showed a seasonally-adjusted slowdown at the end of the year. Looking across 2022, however, goods consumption remained fairly stable. Further, there was evidence that consumers have money to keep buying if they choose to.

In Focus - Personal Consumption Expenditures

The latest batch of BEA data for December seemed to herald a slowdown in consumption. With a little perspective, though, the story doesn’t seem quite so clear, or so grim.

In real terms, overall Personal Consumption Expenditures (PCE) fell by 0.3% in December, following a 0.2% fall in November (revised down from flat, as first reported). Looking at the major components, services were unchanged for December; nondurable goods fell by 0.2% in November and 0.4% in December; durables (goods meant to last three years or more) fell even more sharply—down 2.1% in November and 1.6% in December.

If those changes don’t seem to average out to the headline PCE numbers, keep in mind that the categories differ in size. For 2022, services consumption made up 65.8% of PCE; nondurables were 21.6%; and durables were 12.6%. And that percentage for services is actually depressed from its pre-Covid norm.
The chart is meant to put the recent months in a broader context. It normalizes each of the subcategories of PCE so that its December 2021 level is set equal to 100. That makes it easy to see percentage fluctuations throughout the year.

Services consumption continued the steady recovery it has shown after a sharp fall in the spring of 2020. Even the flat performance in December still left it with a respectable 3.3% gain for the year.

While nondurables had a recent peak in October, the variations across the year have been fairly small and the category ended up down 0.8% for the year. Durables had much more notable ups and downs. The previous increases meant that, despite recent declines, durables ended the year up 1.8%.
If we extended the graph back even further, we’d see that both of these goods categories had their pandemic peak in the spring of 2021. Volatile durables consumption peaked 36.5% above pre-pandemic consumption and has subsided 10.6% since. Smoother nondurables peaked up 12.4% above February 2020 and dropped back by only 2.2% as of December 2022.

One key determinant of PCE is the amount of money consumers have to spend. With the December report, we see that real disposable income was down 6.4% from 2021 to 2022. In nominal terms, that involved a drop of $711bn in government social benefits, but only a $102bn drop in disposable personal income. There were other factors as well, but this rebalancing of income included an $863bn increase in wages and salaries.

Looking at monthly trends, real disposable personal income grew every month since June 2022. It was up 0.2% in December. That hasn’t translated directly into PCE growth because the savings rate steadily increased from 2.4% in September to 3.4% in December.

So what does the perspective tell us? That consumption has been fairly stable across the year and that, so far, consumers appear to have the money to keep buying.

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Economic Developments

US real GDP grew at a 2.9% rate in Q4, down from 3.2 in Q3 but still an impressive rate. Personal Consumption Expenditures were the biggest contributor. “Final Sales to Private Domestic Purchasers,” which can be a more stable guide to economic growth, fell to 0.2%, its lowest level since the pandemic contraction in Q2 of 2020.

The US inflation measure that may be the most influential with the Federal Reserve, the 12 month measure of Trimmed Mean PCE, dropped to 4.4% in December, its lowest level since May. It peaked at 4.8% in August.

-Untrimmed deflators from the December BEA Personal Income and Outlays report showed that annual goods inflation dropped sharply, from 10.6% in June to 4.6% in December. Over that same time period, services inflation held fairly steady, starting at 5.1% in June and ending at 5.2% in December.

US durable goods orders grew by 5.7% in December, following a 1.7% fall in November. The seasonally-adjusted number was heavily driven by transportation equipment orders.

Initial jobless claims hit their lowest level since April of last year. They registered 186K last week, down from a recent high of 241K in November.

In the Euro Area, household real consumption rose by 0.5% in Q3 of last year, following a 0.5% rise in Q2. Household real income rebounded from a 0.7% fall in Q2 to a 0.4% rise in Q3.

Germany’s Ifo Business Climate Index rose in January, continuing a steady climb since a recent low in September.

South Korea’s economy contracted in Q4, as real GDP fell by 0.4%. It was the first fall since Q2 of 2020 and reflected a 5.8% fall in exports.

Political Developments

In the context of a festering dispute with the European Union over U.S. subsidies for electric vehicles, both Treasury Secretary Janet Yellen and Senator Joe Manchin (D-WV) suggested the U.S. could seek a new trade deal with Europe to resolve the issue.

The Biden administration held a virtual ministerial event and announced its intention to move forward with Americas Partnership for Economic Prosperity trade talks that involve countries representing 90% of Western Hemisphere GDP (but not Brazil or Argentina). Unlike traditional trade talks, there are no plans to offer greater market access.

After a WTO dispute settlement panel ruled against U.S. national security tariffs (Sec. 232), the US government last week appealed the cases to the WTO’s Appellate Body. Since the U.S. has blocked new appointees to the Appellate Body and thus prevented its functioning, the move effectively tables the disputes. China objected to the move and said the U.S. was declaring itself to be “above the law.”

Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.