Consumer Spending Declined in December by Most in Five Years

Updated on
U.S. Consumer Spending Falls 0.3% as Incomes Rise 0.3%

Consumer spending fell in December as households took a breather following a surge in buying over the previous two months.

Household purchases declined 0.3 percent, the biggest decline since September 2009, after a 0.5 percent November gain, Commerce Department figures showed Monday in Washington. The median forecast of 68 economists in a Bloomberg survey called for a 0.2 percent drop. Incomes and the saving rate rose.

Consumers responded to early promotions by doing most of their holiday shopping in October and November, leading to the biggest jump in consumer spending last quarter in almost nine years. For 2015, a pick-up in wage growth will be needed to ensure households remain a mainstay of the expansion as the economy tries to ward off succumbing to a global slowdown.

“Consumers are in a good mood coming into 2015, and we think that’s likely to continue,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, who correctly forecast the drop in outlays. “The prospects for 2015 look very encouraging.”

Stock-index futures held earlier gains after the report. The contract on the Standard & Poor’s 500 Index maturing in March rose 0.2 percent to 1,991.5 at 8:47 a.m. in New York.

Survey Results

Projections for spending ranged from a decline of 0.6 percent to a 0.2 percent gain. The previously month’s reading was initially reported as an increase of 0.6 percent.

For all of 2014, consumer spending adjusted for inflation climbed 2.5 percent, the most since 2006.

Incomes climbed 0.3 percent in December for a second month, the Commerce Department’s report showed. The Bloomberg survey median called for a 0.2 percent increase. November’s income reading was revised down from a 0.4 percent gain previously reported.

While growth in the world’s largest economy slowed in the fourth quarter, consumption surged, with household spending rising at the fastest pace since early 2006, a report from the Commerce Department last week showed.

Gross domestic product climbed at a 2.6 percent annual rate from October through December after a 5 percent pace in the third quarter, the report showed. Cheaper gasoline and labor market improvement helped consumption grow at a 4.3 percent rate, though business investment cooled amid plunging oil prices and concerns that growth in overseas markets is faltering.

Inflation Adjusted

After adjusting for inflation, which generates the figures used to calculate GDP, purchases dropped 0.1 percent in December after jumping 0.7 percent the previous month, according to the report.

Spending on durable goods, including automobiles, decreased 0.7 percent after adjusting for inflation, following a 2.5 percent gain. Purchases of non-durable goods, which include gasoline, fell 0.1 percent.

Automobile demand was a pillar of strength for the economy in 2014, with light-vehicle sales totaling 16.5 million, the most since 2006. And after last year’s strong finish, analysts surveyed by Bloomberg raised their 2015 estimates, forecasting 16.9 million deliveries.

Gasoline Prices

Those sales have been fueled in part by a drop in oil prices and the cheapest gasoline in years. The average price of a gallon of regular gasoline was $2.06 on Feb. 1, compared to the 2014 peak of $3.70 reached in April.

Expenditures on services were little changed after adjusting for inflation, the weakest reading since April, Monday’s figures showed. The category, which includes tourism, legal help, health care, and personal care items such as haircuts, is typically difficult for the government to estimate accurately until more information is available in later months.

The oil-price plunge is also weighing on inflation, making it more difficult for the Federal Reserve to determine the timing of its first interest rate increase since 2006. The price index tied to consumer spending declined 0.2 percent in December for a second month, the Commerce Department report showed.

From a year earlier, the gauge was up 0.7 percent, the smallest increase since October 2009. This inflation measure is preferred by Fed policy makers and hasn’t been above their 2 percent goal since March 2012.

Less Inflation

Stripping out the volatile food and energy components, the price measure was little changed from the month before, and climbed 1.3 percent in the 12 months ended December.

Central bank policy makers upgraded their assessment of the U.S. economy, saying “activity has been expanding at a solid pace,” in a Jan. 28 statement that also maintained a pledge to be “patient” on raising interest rates. “Labor market conditions have improved further, with strong job gains and a lower unemployment rate.”

Progress in the labor market has helped boost incomes, albeit slowly. Almost 3 million more people found work in 2015, the most since 1999.

Tyson Foods Inc. is among companies contributing to the improvement. The largest U.S. meat producer plans to create more than 500 jobs at its Vienna, Georgia, poultry plant amid growing demand for its products.

“In the past quarter, consumer confidence, lower gas prices and unemployment data were tailwinds that we expect will continue to favor food spending in the New Year,” Chief Executive Officer Donald Smith said on a Jan. 30 earnings call. “But pressures like long-term unemployment and limited wage growth still weigh on a lot of people.”

Disposable income, or the money left over after taxes, increased 0.5 percent in December from the prior month after adjusting for inflation. It was up 3.7 percent over the past 12 months. The saving rate increased to 4.9 percent from 4.3 percent in November.

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