US consumer spending up in December, while saving rate fell

WASHINGTON – Americans increased their spending 0.4 per cent in December, a solid pace but slower than the big spending burst seen in November, while their saving rate fell to a more-than decade low.

The Commerce Department said Monday the spending gain followed a 0.8 per cent surge in November. Incomes were up 0.4 per cent, helped by a healthy rise in wages that reflects the fact that unemployment is at a 17-year low of 4.1 per cent.

But the saving rate fell to 12-year low of 2.4 per cent, the lowest level since a 2.3 per cent rate in September 2005. The low level underscores the fact that wage gains have only recently started to rebound following years of weak gains. That has forced Americans to dip into their savings to support their higher spending.

Recent declines in the saving rate probably also reflect the recent rise in net wealth that has been propelled by a surge in the stock market. Households tend to spend more and save less as their assets such as home prices and stock holdings rise in value.

A key inflation gauge tracked by the Federal Reserve was up a tiny 0.1 per cent in December. It has risen 1.7 per cent over the past 12 months, still below the Fed’s 2 per cent inflation goal.

Consumer spending is closely watched because it accounts for 70 per cent of economic activity. Strong spending helped support overall economic growth of 2.6 per cent in the fourth quarter.

The 0.4 per cent rise in spending last month reflected a strong 0.7 per cent increase in spending on durable goods such as autos. That helped offset a 0.2 per cent drop in nondurable goods spending, a drop that reflected in part a fall in gasoline prices. Spending on services rose 0.5 per cent, an increase that reflected in part a jump in spending on utility bills because of unseasonably cold weather in many parts of the country.

Paul Ashworth, chief U.S. economist at Capital Economics, said the big jump in auto sales in December was tied to the need to replace 300,000 autos damaged during last year’s hurricanes and was not likely to last.

“The strength of motor vehicle sales is a temporary post-hurricane surge,” he said.

The economy grew at a 2.3 per cent rate for all of 2017, a significant rebound from 1.5 per cent in 2016 but still well below the goal set by the Trump administration to boost growth to 3 per cent or better. President Donald Trump will deliver his first State of the Union address on Tuesday night. He is expected to tout the benefits of his $1.5 trillion tax cut and other aspects of his economic program, including deregulation and increased infrastructure spending.

The Federal Reserve meets this week, and officials are expected to leave interest rates unchanged. Economists are forecasting three rate hikes this year following three hikes in 2016. They expect that low inflation will finally approach the Fed’s 2 per cent goal this year, which would prompt further rate hikes.