Consumer Spending Strong, Inflation Stagnant

Consumer spending, up 0.6 percent in November, is strong but there are still soft spots in the personal income and outlays report. Income rose only 0.3 percent as transfer receipts from the government fell sharply to offset a respectable 0.4 percent gain in wages and salaries. And behind the rise in consumer spending is a 1.2 percent spike in nondurable spending that reflects higher gasoline prices in the month. Durable spending, held down by a slowing in vehicle sales, was unchanged in November though service spending accelerated 4 tenths to a strong 0.6 percent monthly gain. Behind all the spending was a sharp 3 tenths drawdown in the savings rate to only 2.9 percent which is the weakest showing in 10 years, since November 2007.

The central trouble is once again in the report's inflation data as the core PCE price index, the most closely followed of any inflation indicator and which excludes energy and food, inched only 0.1 percent higher with the year-on-year rate also 1 tenth higher at 1.5 percent and still far below the Federal Reserve's 2 percent target. The overall PCE price index rose 0.2 percent with this year-on-year rate up 2 tenths to 1.8 percent.

The inflation data are moving in the right direction but just barely. And while the spending and wage data are favorable, the low level of the savings rate may become a concern especially if the labor market begins to lose strength. For retailers and holiday spending, today's report is solid but still less than robust.

Recent History Of This Indicator:
Income and spending growth were respectable in October and the core PCE price index did show limited but still welcome improvement. For November, personal income is seen rising 0.4 percent while consumer spending, getting a boost from the month's surge in retail sales, is expected to come in at 0.5 percent. The PCE price index is expected to rise 0.3 percent for a year-on-year rate of 1.8 percent with the core PCE price index, which rose 0.2 percent in October and which excludes both food and energy, seen up only 0.1 percent for a yearly 1.5 percent.