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Incomes Pop, Consumer Pull Back in December

RFP
Personal disposable income jumped 1% after adjusting for inflation in December. A drop in prices at the pump were aided by subsidies paid to farmers to compensate for retaliation on tariffs.

Personal consumption expenditures plummeted 0.6% during the month. November gains were revised up, but didn’t change the smaller slice of consumer spending captured in the retail sales data, which was ugly. Losses were widespread with declines in all categories of spending, including services. The data is still consistent with the 2.8% gain in consumer spending that we saw in the fourth quarter GDP. It just tells us that much of the quarterly strength was front loaded.

Delays due to the government shutdown meant that we also got a partial report for January. Only the income data was released; it was not pretty. Disposable personal income dropped 0.2% before adjusting for inflation, which has yet to be calculated. The government shutdown, delays in the next round of subsidies to farmers, and a loss in dividend and interest income were the primary reasons for that weakness. Manufacturing income also dropped slightly, tracking with the drop in production during the month. The polar vortex disrupted the supply chain, forcing some plant closures.

The personal consumption expenditure (PCE) deflator, which better tracks inflation than the CPI, rose a negligible 0.1%. That takes the year-on-year read on inflation down to 1.7%. Lower prices at the pump is a large factor and is now reversing. The core PCE (excluding food and energy) rose 0.2%, and stabilized at a 1.9% year-over-year pace, the same as November, and a bit higher from October’s low of 1.8%.

The Fed targets the PCE measure of inflation at 2%; we are still below that giving the Fed latitude to pause and step to the sidelines in 2019. Given how long we have undershot the Fed’s target, the Fed would actually tolerate slightly higher inflation than the 2% for a period.

Bottom Line
Today’s data confirms that consumers pulled back in December, after spending much more earlier in the quarter. Preliminary data on January was weak as well. Good news is many of the factors that held us back in January are transitory, and consumer attitudes have improved significantly since the government reopened and the markets have stabilized.

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