Household spending resilient, income is the rub—for now

Summary

Consumer spending remains resilient according to the shutdown-delayed data for October and November. Today's data suggest real PCE could expand nearly 3% in the fourth quarter, carrying forward the third quarter's momentum. Yet the trend in income growth remains soft. Real disposable income moderated to 1.0% year-over-year in November, continuing to run well behind real consumer spending, which was up 2.6% over the same period. While the gap between income and spending growth raises concern about the sustainability of the recent pace of outlays, upcoming tax relief should help sustain a 2.0%-2.5% pace of real consumer spending through 2026.

Somewhat lower inflation should also help support real spending. October and November's readings on PCE inflation were depressed by collection issues related to the shutdown, but even after factoring in a pickup in December, the trend in inflation has leveled off. We continue to expect inflation to subside this year with the lapping of tariff increases, the cooler jobs market and strong productivity growth.

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