Consumer Spending Is Back Soaring High! Can the U.S. Avoid a Recession?


 U.S. consumer spending rebounded sharply in January amid strong earnings growth, while rising inflation could still add to financial market concerns that the Federal Reserve could raise interest rates over the summer.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 1.8% last month, the Commerce Department reported on Friday. Data for December was revised higher showing spending down 0.1% versus 0.2% as previously reported. Economists polled by Reuters had forecast consumer spending rebounding by just 1.3%.

Spending was found to be driven by an 8.7% cost of living adjustment, the largest increase since 1981, for more than 65 million Social Security recipients, which boosted incomes.

Nevertheless, a strong performance put consumer spending on a higher growth path at the start of the first quarter. Consumer spending slowed in the fourth quarter, with most of the loss of momentum occurring in the last two months of 2022.

Strength in consumer spending, combined with a resilient labor market, indicates the economy is far from recession.

Moody's analysts believe the worst-case scenario for the economy would be a slow recession, where growth almost stops but never slips backwards.

The Fed is expected to deliver two additional rate hikes of 25 basis points in March and May, and financial markets are betting on another hike in June. U.S. central bank has raised its policy rate by 450 basis points since last March from near zero to a range of 4.50%-4.75%.

The price index of personal consumption expenditures (PCE) rose 0.6% last month after gaining 0.2% in December. In the 12 months to January, the PCE price index rose 5.4% after rising 5.3% in December.

Excluding volatile food and energy components, the PCE price index rose 0.6% after rising 0.4% in December. The so-called PCE core price index rose 4.7% on a year-over-year basis in January after rising 4.6% in December.