US: Household Spending Capped 2017 off on a Strong Note

Personal income rose 0.4% in December, beating the consensus expectation for a 0.3% gain. Controlling for inflation and removing taxes, real disposable income rose 0.2% on the month, following a flat reading in November.

Personal spending ended 2017 on a strong note, up 0.4% in nominal terms. In real terms, spending was up 0.3%, following an even better (and upwardly revised) print of 0.8% in November (previously 0.6%).

By component, real spending on durable goods led the way, up 0.8%. Services were up 0.3%, while non-durable goods spending took a breather (effectively flat), following a 1.0% gain in November.

Prices rose 0.1% month-on-month in December, as energy prices pulled back (-1.2%). As a result, headline inflation edged down to 1.7% year-on-year (from 1.8%). Core prices firmed, rising 0.2% (m/m) in December, leaving core inflation unchanged at 1.5% year-on-year.

The personal saving rate edged down to 2.4% from a downwardly revised reading of 2.5% in November. The saving rate, while prone to revision, has only been lower in 2005, when it hit 1.9%

Key Implications

Personal spending ended 2017 on a strong note as the after effects of hurricanes helped to lift durable goods spending. While encouraging to see such a strong end to the year, spending growth has decelerated noticeably at the start of the calendar year over the past two years, part of the “residual seasonality” in real GDP growth in the quarter.

It remains to be seen whether this trend will continue in 2018, but there are mitigating factors that suggest it may not. Perhaps most important, after tax income growth will get a boost in the New Year. The cut in taxes should allow households to rebuild their saving buffer while maintaining a healthy pace of spending growth.

Inflation is still nothing to write home about, but the pickup in core price growth (up 1.9% annualized on average over the past three months) in December may give some comfort to the Federal Open Market Committee as it meets to set policy this week. The Fed is likely to remain on hold at this meeting, but a rate hike is likely coming in March at the first meeting Chaired by Jerome Powell.