Consumer spending fell for a second straight month in December as consumers cut spending after a bumpy year colored by a strong market but also rapid inflation that eroded savings and presented a financial challenge for many Americans.
Personal spending fell 0.2 percent in December, the Commerce Department said on Friday. Adjusted for inflation, expenditure fell by 0.3 percent. November spending, which the government initially reported as a modest increase, was revised to show a small decline.
Incomes continued to rise, reflecting the strong labor market. But instead of continuing to spend, Americans chose to save more, a sign that consumers could become more cautious amid news of layoffs and rumors of a possible recession.
Friday’s data is among the latest data on the state of the economy that the Federal Reserve will receive before releasing it next interest rate decision on February 1. The central bank is widely expected to increase borrowing costs by a quarter of a point, slowing the pace of interest rate changes to give officials more time to see how the economy is developing.
Central bankers mainly monitor the labor market and spending trends as they try to guess how much policy adjustment is needed. The Fed’s rate moves work by slowing the labor market and dampening demand, which in turn forces companies to raise prices more slowly to avoid losing customers.
But for much of last year, the economy remained fairly resilient in light of the Fed’s interest rate movements. While consumer savings are being eaten away by rapid inflation, so are some Americans expenditures are gradually but steadily falling extra money they stashed away during the depths of the pandemic. Others have benefited from a strong labor market and solid wage growth, enabling them to afford products and services.
However, the economy and the labor market are expected to slow this year as the Fed’s policy changes constrain the economy. Notably, inflation is expected to fall as it does, based on the most recent central bank data economic projections.