U.S. consumer spending fell in December, putting the economy on a lower growth path heading into 2023, while inflation continues to ease, which could give the Federal Reserve room to further slow the pace of its rate hikes next week.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, fell 0.2% last month, the Commerce Department reported on Friday. Data for November was revised lower to show spending fell 0.1% instead of gaining 0.1% as previously reported. Economists polled by Reuters had forecast consumer spending falling 0.1%.
The data was included in the preliminary fourth-quarter gross domestic product report published on Thursday, which showed consumer spending maintained a strong growth rate and helped the economy grow at an annual rate of 2.9%.
Weak data heading into 2023 raises the risk of a recession heading into the second half of the year, but also reduces the need for the U.S. central bank to do more. to maintain an overly aggressive monetary policy stance. The Fed's fastest rate hike cycle since the 1980s has pushed the housing market into recession and manufacturing is in the early stages of a downturn.
Higher borrowing costs have reduced demand for goods, which tend to be bought on credit. While the growth in service spending helped anchor consumption, some households, especially those with low incomes, have already depleted their accumulated savings during the Covid-19 pandemic.
The price index of personal consumption expenditures (PCE) rose 0.1% last month after a similar increase in November. In the 12 months to December, the PCE price index rose 5.0% after rising 5.5% in November.
Excluding volatile food and energy components, the PCE price index rose 0.3% after rising 0.2% in November. The so-called PCE core price index rose 4.4% on a year-over-year basis in December after rising 4.7% in November.
The Fed tracks the PCE price index for monetary policy. Other measures of inflation have also slowed significantly.
The Fed last year raised its policy rate by 425 basis points from near zero to a range of 4.25%-4.50%, the highest since late 2007. Financial markets had priced in a 25 basis point rate hike on Jan. 31. Feb. 1 meeting, according to CME's FedWatch Tool.
