Consumer spending dropped in December for the second month in a row, as consumers retrenched after a bumpy year colored by a strong market but also rapid inflation that eroded savings and posed a financial challenge for many Americans.
Personal spending fell by 0.2 percent in December, the Commerce Department said Friday. After adjusting for inflation, spending fell 0.3 percent. Spending for November, which the government initially reported as a modest increase, was revised to show a small decline.
Incomes continued to rise, reflecting the strong job market. But instead of continuing to spend, Americans chose to save more, a sign that consumers might be becoming more cautious amid news of layoffs and talk of a possible recession.
Friday’s data is among the last readings on the state of the economy that the Federal Reserve will receive before it announces its next interest rate decision on Feb. 1. The central bank is widely expected to raise borrowing costs by a quarter of a point, slowing its pace of rate moves to give officials more time to see how the economy is shaping up.
Central bankers are particularly watching 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 job market and tempering demand, which in turn force companies to increase prices more slowly to avoid losing customers.
But for much of last year, the economy remained fairly resilient in the face of the Fed’s rate moves. While consumer savings are being eaten up by rapid inflation, some Americans have been gradually but steadily spending down extra money that they tucked away during the depths of the pandemic. Others have benefited from a strong labor market and solid wage growth, which have been helping them to afford products and services.
The economy and job market are expected to slow this year, though, as the Fed’s policy moves restrict the economy. Inflation is expected to come down notably as that happens, based on the central bank’s most recent economic projections.