Nation’s consumer spending slows in December
WASHINGTON — U.S. consumer spending slowed in December as Americans spent more on prescription drugs and health care services but those gains did not offset a sharp slowdown in spending on new cars.
The Commerce Department said Friday that consumer spending rose a moderate 0.3% after a 0.4% gain in November.
A solid labor market continues to support spending, though pay gains show signs of deceleration despite high labor demand.
Income growth also slowed in December, rising by 0.2%, just half the 0.4% increase in November. By sector, wage and salary gains cooled in construction, financial activities, and professional and business services.
Inflation, as measured by a price gauge preferred by the Federal Reserve, was up 0.3% in December compared with a 0.1% November increase.
However, for the full year, prices rose 1.6%, well below the Fed’s 2% target. The modest inflation readings last year gave the Fed the leeway to cut its benchmark interest rate three times to protect the economy from a global slowdown and manufacturing disruptions caused by the U.S.-China trade war.
The data follow the latest statement from Fed policy makers, who on Wednesday kept their main interest rate unchanged while stressing the importance of lifting inflation to their target.
Consumer spending is closely watched because it accounts for 70% of economic activity. The economy, as measured by the gross domestic product, grew at a
2.1% annual rate in the fourth quarter, matching the gross domestic product performance in the third quarter. Consumer spending increased at a 1.8% rate after six months of much bigger gains.
Despite the fourth quarter slowdown, economists believe consumer spending will remain a fundamental driver of the U.S. economy, boosted by a strong labor market which has pushed unemployment to a 50-year low.
For all of 2019, the gross domestic product grew by 2.3%, a sharp drop from 2.9% gross domestic product growth in 2018, which had been the fastest pace since a similar gain in 2015.
Economists look for more slowing this year as the boost from the 2017 tax cuts fade
further but they do not expect a recession this year, in large part because a cease-fire in the U.S.-China trade conflict has improved the outlook for business investment.
For December, spending on durable goods such as cars fell by 0.8% while spending on nondurable goods such as food rose by 0.9%. Much of that increase reflected a big jump in spending on prescription drugs.
Services were up 0.3%, with a big factor a rise in spending on health services.
The various changes left the personal saving rate at 8% of after-tax income in December, up from 7.7% in November.
Other reports Friday showed U.S. consumer sentiment rose in January to an eight-month high, according to a University of Michigan survey, while a gauge of business activity in the Chicago region fell to a four-year low, adding to signs that corporate investment remains sluggish.
Consumers last year aided the world’s largest economy as it was whipsawed by trade policy, a manufacturing slump and faltering business investment. While tensions with China have cooled somewhat, headwinds from factories and investment remain.
In a separate report from the Labor Department on Friday, the employment cost index, a broad gauge monitored by the Fed, rose 0.7% in the fourth quarter from the previous period, as projected. The measure decelerated to a 2.7% annual gain, consistent with other data showing slower gains for workers in late 2019.
The slowdown in salary and benefit growth has been a surprise to economists, since the unemployment rate, currently 3.5%, is at a half-century low and hovered near that level for most of last year. Businesses typically are forced to pay more and offer better perks when the labor market is so tight.
Some economists speculate that the slowdown in hourly wage growth in the jobs report reflects an increase in the number of lower-paid workers. With unemployment so low, more companies are hiring people who previously weren’t working or looking for work, mostly in lower-paying jobs. That increase could drag down broader measures of wage growth.
The employment cost index controls for such shifts, yet still shows that wage growth stalled last year.
Information for this article was contributed by Martin Crutsinger and Christopher Rugaber of The Associated Press and by Jeff Kearns and Kristy Scheuble of Bloomberg News.