Americans Are Spending More, Saving Less

Americans splurged in December, powered by an accompanying rise in incomes, in the latest signal of economic strength, even as they saved less, the Commerce Department's Bureau of Economic Analysis showed on Friday.

Personal consumption expenditures, or PCE, went up by nearly $134 billion, a 0.7 percent increase, in December. Meanwhile, personal incomes also jumped by $60 billion but at a much slower pace of 0.3 percent.

The data suggested that consumers were making up the difference by dipping into their savings, which went down to $767 billion last month from November's $850 billion. The personal savings rate—personal savings as a proportion of disposable income—fell to 3.7 percent, the lowest it's been in a year.

"Stronger spending is being driven partly by falls in the saving rate, which is now at a 12-month low. A rebound in the saving rate is a downside risk to the outlook later this year," Michael Pearce, lead U.S. economist at Oxford Economics, said in a note shared with Newsweek.

Analysts pointed out that consumers are also increasingly feeling better about the economy after spending the better part of last year unhappy about their financial conditions.

"Consumer attitudes improved in December and early January, although their attitudes about the economy have not been a hurdle to spending," Diane Swonk, KPMG's chief economist, said in a statement. "They reflect a complex mix of emotions, not the least of which includes the roller coaster of surviving a pandemic and the inflation that ensued."

Consumer spending has fueled the U.S. economy even amid tight monetary conditions as a result of the Federal Reserve's hiking of rates at their most aggressive pace since the 1980s to battle inflation. The current Fed funds rate sits at a range of 5.25 to 5.5 percent, the highest in two decades, which has pushed up borrowing costs for mortgages, auto loans and business investment.

The economy accelerated on better-than-expected 3.3 percent growth in the fourth quarter of 2023 on the back of robust consumer spending, the Commerce Department said Thursday. Strong growth amid elevated rates has economists believing that the U.S. is poised for a soft landing, meaning that inflation is set to moderate without doing too much damage to the economy.

Inflation outlook for 2024

The Fed's rate increases have helped lower inflation toward its target of 2 percent.

In a signal that the inflation is moving in the right direction, the PCE index—the central bank's preferred metric to track inflation—was unchanged from November but jumped 2.6 percent in December on a year-over-year basis. The core PCE, which strips out the volatile energy and food prices, accelerated on a yearly basis by 2.9 percent in December compared to 3.2 percent in November.

Inflation's progress has analysts expecting that the Fed will begin cutting rates this year, a move geared to buoy the economy and add to its momentum.

"The Federal Reserve has been waiting for core PCE, which is the best predictor of future inflation, to dip below the 3 [percent] threshold, convincingly, before cutting rates," Swon said. "The goal is to cut before inflation reaches its 2 [percent] target on a year-over-year basis to avoid overtightening and an unnecessary increase in unemployment."

But some analysts warned that Fed officials, who are set to gather next week for their first policy meeting of the year, may need to be cautious and not rush to cut rates amid geopolitical risks, such as the fighting near the Suez canal that has slowed shipping traffic of goods and could potentially spark price increases.

"The inflation trajectory is improving, giving the Fed leeway to cut rates this year," Jeffrey Roach, chief economist for LPL Financial, said in a note. "However, the Fed has further work to do and should not be tempted to declare 'mission accomplished.' Investors shouldn't be surprised to see a temporary uptick next month in goods inflation from the disruptions in shipping."

Other economists suggest that should the inflation trend continue to move downward, the Fed may begin to slash rates by the spring.

"We expect the Fed will have enough confidence to begin cutting interest rates at their late April/early May meeting, though the backdrop of a strong economy means they are likely to cut rates only gradually this year," Pearce said.

Update 1/26/24, 12:42 p.m. ET: This article was updated with additional comments, background and context.