US consumer spending flat in December but savings rate up

“The strength in income, combined with generally encouraging confidence data, points to re-acceleration in spending in early 2016”, said Jim O’Sullivan, chief USA economist at High Frequency Economics. But he noted that an increase in the share of earnings Americans are saving could provide a cushion in the case of an economic downturn.

For all of 2015, home construction rose 12.6 per cent, while private non-residential activity was up 12 per cent. This sector was strong for most of the year, but it has declined in three of the past four months. In addition, analysts blamed a wetter-than-normal month for holding back spending on autos.

US construction spending rose 0.1% in December to a seasonally adjusted annual rate of $1.12 trillion, the Commerce Department reported Monday. Consumption climbed an upwardly revised 0.5% in November and was flat in October.

A key concern of Fed officials is stubbornly low inflation, and Monday’s report showed the problem worsened in December. Spending had been expected to inch up by 0.1 percent. Core PCE is below the USA central bank’s 2 percent target.

The December drop was the first since September. 1, 2016, the Commerce Department issues its December report on consumer spending, which accounts for roughly 70 percent of US economic activity.

Over the past year, the bulk of discretionary spending has been geared towards big-ticket items like cars and furniture, as well as services like restaurants and travel.

Spending on private construction was down 0.6% to a seasonally-adjusted annual rate of $824bn from $828.8bn in November. Outlays for all of 2015 were 10.5% higher than in 2014. But the PCE reading might, along with larger concerns about a slowdown in growth, could compel the Fed to delay further interest rate increases.

Economists surveyed by The Wall Street Journal had forecast a 0.1 per cent rise in spending and a 0.3 per cent rise in incomes.

Americans tucked away slightly more of their earnings in December compared with November, bringing the personal saving rate to 5.5% from 5.3% in November. It also hit 5.5 per cent in October, and has ticked up gradually over the past two years.

With Americans spending less than they earned at the end of the year, the savings rate rose to 5.5% from 5.3%. MFR, Inc. economist Joshua Shapiro predicts that several factors, beyond the current labor market, could change Americans’ current spending habits. That was a major factor dragging overall growth lower.