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US Consumer Spending Struggles Up After Two Years

Published: February 28, 2023
People shop at a Target store during Black Friday sales in Chicago, Illinois
FILE PHOTO: People shop at a Target store during Black Friday sales in Chicago, Illinois, U.S., November 25, 2022. REUTERS/Jim Vondruska

U.S. consumer spending increased by the most in nearly two years in January following an uptick in wage gains, with the Federal Reserve expected to raise interests into summer.

The report from the Commerce Department on Friday, Feb. 24, conjured data earlier this month showing fragile job growth in January despite the soaring inflation and the lowest unemployment rate in more than 53 years.

“Clearly, tighter monetary policy has yet to fully impact consumers and shows that the Fed has more work to do in slowing down aggregate demand,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. 

“This report all but ensures the Fed will continue on its rate hiking campaign for a lot longer than markets anticipated just a few weeks ago,” Roach postulated.


Consumer spending, which makes up more than two-thirds of all economic activity in the United States, increased by 1.8 percent last month. Since March 2021, that growth has been the biggest. 

Statistics for December were updated to reflect a 0.1 percent decrease in spending, as opposed to the 0.2 percent decline that had been previously reported. According to economists surveyed by Reuters, consumer spending was expected to increase by 1.3 percent.

Consumer expenditure climbed by 1.1 percent after accounting for inflation, which is also the highest gain since March 2021. In November and December, so-called actual consumer spending fell.

Consumer spending

Consumer spending increased on durable manufactured products, including cars, furniture, and equipment for the home, as well as on toys and vehicles for amusement. They also purchased clothing. Outlays on goods increased by 2.8 percent. Expenditure on services was also high, rising by 1.3 percent. Transportation, recreation, and healthcare services all went up.

Pay increases of 0.9 percent contributed to the total rise in spending. For more than 65 million recipients of Social Security, an 8.7 percent cost of living adjustment — the most significant increase since 1981 — offset a decline in government social payments. That reflected the expiration of the extended child tax credit program.

In the fourth quarter, consumer spending fell, with the final two months of 2022 seeing the most of the decline in momentum.

The information and a separate report from the Commerce Department showing that new home sales surged 7.2 percent in January led Goldman Sachs to increase its tracking estimate for the first-quarter gross domestic product by 0.4 percentage points to a 1.8 percent annualized pace. In the fourth quarter, the economy expanded at a 2.7 percent annual rate.

More rate hikes

The personal consumption expenditures (PCE) price index went up 0.6 percent last month, the largest increase since June 2022, after gaining 0.2 percent in December. In the 12 months through January, the PCE price index revved by 5.4 percent after rising by 5.3 percent in December.

The PCE price index rose 0.6 percent when the erratic food and energy components were excluded. This increase followed a 0.4 percent increase in December and was the most since August 2022. After rising 4.6 percent in December, the so-called core PCE price index gained 4.7 percent year over year in January.

Two additional rate increases of 25 basis points are anticipated from the Fed in the months of March and May. On Friday, traders increased their wagers for another rise in June. Since last March, the U.S. central bank has increased its policy rate by 450 basis points, moving it from near zero to a range of 4.50 to 4.75 percent.

The Fed tracks the PCE price indexes for monetary policy. According to economists’ calculations, core services prices, excluding housing, which are closely watched by policymakers, increased 0.6 percent after climbing 0.4 percent in December.

Personal income increased by 0.6 percent, the bulk coming from overall modest wage growth. After adjusting for inflation, income at the disposal of households also rose by 1.4 percent, the largest increase since March 2021. Disposable income was also spurred by a 7.9 percent drop in tax payments.

Consumers increased savings even as they stepped up spending. The savings rate rose to 4.7 percent, the highest in a year, from 4.5 percent in December.

“Households are drawing down excess savings at a slower rate than before, likely due to recession concerns,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.