Personal Consumption: The Story Continues

Personal consumption expenditures dropped another 0.2 percent in January after falling 0.3 percent in December. Meanwhile, personal income increased a healthy 0.3 percent after a similar rate in December. 

Personal Spending Lower than Expected

Although personal spending was lower than expected in January, dropping 0.2 percent after falling 0.3 percent in December, real personal consumption expenditures, which dropped 0.1 percent in December, improved 0.3 percent in January. Still, the story remains that personal consumption slowed in the final month of the prior year. However, that weakness came after very strong real growth in October and November. Much of the weakness in nominal terms for spending was also related to the drop in gasoline prices, just as it was in December. However, service spending was stronger in January, growing 0.5 percent in nominal terms, helping reduce the weakness in nondurable goods consumption, which dropped 2.2 percent. Also, the weakness in durable goods spending in January was not as pronounced as in December. Durable goods dropped only 0.1 percent in nominal terms in January versus a 1.4 percent drop in December. Still, because nondurable goods consumption was so weak in January, overall goods consumption was lower by 1.5 percent in nominal terms in the month compared to a drop of 1.4 percent for December.

With the strong real personal consumption number in January plus the strong personal income and real disposable personal income reported today, we remain confident that real personal consumption expenditures will remain strong in the first quarter of this, but not as strong as what we saw in the Q4-2014.

Furthermore, consumption in services will likely remain strong in February as cold temperatures across the U.S. during the month means that consumers likely increased utilities consumption. At the same time, we should see some recovery in the nominal personal consumption number as gasoline prices have stabilized somewhat in February.

Real Disposable Personal Income Supportive of Consumption

Nominal personal income increased 0.3 percent in the first month of 2015, the same rate as in December. In addition, disposable personal income inched up 0.4 percent. But the most important number was that of real disposable personal income, which surged 0.9 percent in January after two consecutive increases of 0.5 percent in November and December. Thus, real disposable personal income has strengthened from a 2.1 percent year-overyear rate in June of 2014 to a 4.2 percent year-earlier rate in January, which means that U.S. consumers should have plenty of ammunition to continue to consume in the months to come.

The saving rate has continued to trend higher in nominal terms in recent months, as it is up a full percentage point from November. At 5.5 percent, we see the saving rate helping to support higher consumption expenditures going forward.