U.S. consumer spending barely rose in November, while annual inflation grew at the slowest pace in 13 months, but demand is likely not cooling fast enough to stop the Federal Reserve from pushing interest rates higher next year.
A slowdown in economic activity in the face of rising credit costs was also suggested by other data from the Department of Commerce on Friday, showing a modest increase in orders for locally manufactured capital goods over the past month. Deliveries of these goods, which are an indicator of companies’ equipment expenditure, fell.
The US central bank is trying to slow demand for everything from homes to workers as it struggles to bring inflation back down to its 2 percent target.
“Consumers are starting to retreat and companies are not likely to fall far behind as the full weight of tighter monetary policy and weaker financial conditions weigh on the economy in 2023,” said Sal Guatieri, senior economist at BMO Capital Markets in Toronto.
Consumer spending, which accounts for more than two thirds of US economic activity, rose slightly by 0.1 percent. The data for October has been revised upwards and now shows that spending rose by 0.9 percent instead of 0.8 percent as previously reported. Economists surveyed by Reuters had forecast an increase in consumer spending of 0.2 percent.
Part of the slowdown in spending last month reflected a shift in demand from goods to services. The slowdown in price increases for some goods also lowered consumer spending in dollars.
Spending on goods fell by 1 percent, due to a drop in motor vehicle purchases. Lower gas prices also had a negative impact, as household furniture and other appliances as well as leisure items and vehicles had an additional impact on sales.
Spending on services rose by 0.7 percent, due to housing and ancillary costs as well as financial services and insurance. They are offsetting the decline in air transport services.
US stocks opened lower. The dollar remained stable against a basket of currencies. US government bond prices fell.
Order goods slowly
Nevertheless, consumer spending is on track to boost economic growth again this quarter, having boosted gross domestic product (GDP) in the third quarter together with exports. The economy grew by 3.2 percent on an annual basis in the last quarter after shrinking in the first half of the year.
Growth estimates for the fourth quarter are up to 2.7 percent. Consumer spending is driven by solid wage increases, driven by a tight labor market, as well as savings accumulated in the first year of the COVID-19 pandemic.
On December 14, the Fed raised its policy rate by 50 basis points to a range of 4.25 to 4.5 percent, the highest since the end of 2007. Fed officials expect the rate to rise to between 5 and 5.25 percent next year, a level that could be maintained for a while.
Higher credit costs, rapidly falling savings and falling household wealth could dampen consumer spending and plunge the economy into recession next year.
Personal income rose by 0.4 percent last month after rising by 0.7 percent in October. The savings rate rose from 2.2 percent in October to 2.4 percent.
The price index for personal consumption expenditure (PCE) rose by 0.1 percent last month after rising by 0.4 percent in October. In the 12 months to November, the PCE price index rose by 5.5 percent. This was the lowest annual growth since October 2021 and followed an increase of 6.1 percent in October.
Excluding the volatile food and energy components, the PCE price index rose by 0.2 percent after rising by 0.3 percent in October. The so-called “core PCE” price index rose 4.7 percent in November compared to the previous year, which is also the smallest increase since October 2021, after rising by 5 percent in October.
The Fed tracks the PCE price indices for monetary policy. Other inflation measures have also shown signs of slowing down.
Consumer prices rose less than expected for the second time in a row in November. Consumer inflation expectations for one year also declined in December, reinforcing the view that price pressures peaked a few months ago.
In another report on Friday, the Commerce Department said that orders for capital equipment that have nothing to do with defense equipment, with the exception of aircraft, a closely watched indicator of companies’ spending plans, rose by 0.2 percent in November. These so-called “core orders for capital goods” rose by 0.3 percent in October. They rose by 8.8 percent compared to the previous year.
The data have not been adjusted for inflation. Slowing price increases, a strong dollar and a shift in spending from goods to services are likely to have contributed to the weakening of key capital goods orders. This affected the manufacturing sector, which accounts for 11.3 percent of the economy.
Deliveries of important capital goods fell by 0.1 percent after rising by 1.4 percent in October. The most important deliveries of capital goods are used to calculate equipment expenditure when measuring gross domestic product. Corporate spending on equipment contributed to the economic recovery in the last quarter.