U.S. consumer spending and confidence both rose at a steady pace in December, but weaker income figures suggest households are likely to face greater spending constraints this year.
Personal consumption expenditures increased $46.6 billion, or 0.3 percent, month-over-month in December, the Commerce Department said in a release, while inflation-adjusted real disposable income fell by 0.1 percent in the same period. Real consumption, which is adjusted for the effects of inflation, rose 0.1 percent month-over-month in December.
Meanwhile, positive sentiment among consumers remains high, according to an index of consumer confidence published this week by the Conference Board. The consumer confidence reading was 131.6 in January, compared to 128.2 in December.
“The consumer has the desire to spend, but without corresponding income gains consumers will eventually be faced with the decision of whether to curtail spending, dip into savings, or take on debt in order to maintain their lifestyles,” said Greg McBride, Senior Vice President and Chief Financial Analyst at Bankrate, in comments to The Epoch Times. “Any restraint on spending hits economic growth, but dipping into savings or taking on more debt aren’t healthy for the household balance sheet.”
In nominal terms, so not factoring in price growth, personal income increased by $40.7 billion, or 0.2 percent in December, month-over-month, Friday’s figures show.
On a quarterly basis, inflation-adjusted real disposable income increased 1.5 percent in the fourth quarter, compared with an increase of 2.9 percent in the third quarter, according to the Commerce Department.
“While everybody spends, only about half of all workers actually got a pay raise last year according to a recent Bankrate poll,” McBride explained. “Spending growth will continue, but that growth rate will be modest.”
‘Pillar on Which the US Economy Rests’
Growth in consumer spending slowed to a 1.8 percent annualized rate last quarter after expanding at a brisk 3.2 percent pace in the July-September period.
“Consumer spending is the pillar on which the U.S. economy rests, with 68 percent of economic output tied to it,” McBride said.
“We’re in a virtuous economic cycle now where low unemployment, continued job growth, and rising household income are the fuel powering consumer spending,” McBride added.
Meanwhile, the economy grew at a 2.1 percent quarter-on-quarter rate in the final three months of 2019, matching the third quarter’s pace.
Robert Johnson, Professor of Finance at Heider College of Business, Creighton University, said he expects a similar rate of growth going forward.
“I believe economic growth in 2020 will be very much in line with the past year, despite continuing support from the Federal Reserve via expansive monetary policy,” Johnson said in a statement to The Epoch Times. “Economic growth is somewhat constrained by the lack of robust growth in corporate capital expenditures. This is a result of uncertainties regarding trade, global economic health, the upcoming presidential election, and in the very near-term, the coronavirus outbreak.”
“Consumer confidence will likely remain fairly strong, absent any dramatic black swans in the stock market,” Johnson predicted. “While certainly not all consumers own equity securities, the health of the stock market is a strong factor influencing consumer sentiment.”
According to the Conference Board, positive sentiment among consumers remains high due to increased optimism about the labor market.
“Consumer confidence increased in January, following a moderate advance in December, driven primarily by a more positive assessment of the current job market and increased optimism about future job prospects,” said Lynn Franco, Senior Director, Economic Indicators, at The Conference Board. “Optimism about the labor market should continue to support confidence in the short-term and, as a result, consumers will continue driving growth and prevent the economy from slowing in early 2020.”
“How consumers feel about their financial security often ebbs and flows based on two things in particular – the job market and the stock market,” McBride explained. “When unemployment rises, many of those that are still employed start to wonder if they’re next. And even consumers that aren’t invested in the stock market look at it as a barometer of whether things are good or bad.”
Besides consumers reporting feeling more assured, CEO confidence also rose quarter-over-quarter, rebounding from a reading of 34 in the third quarter of 2019 to a level of 43 in the fourth quarter.
“CEO Confidence improved in the final quarter of 2019, after having declined to its lowest level in a decade in Q3,” Franco said. “While the abatement of trade and tariff issues has helped improved confidence, CEOs still remain apprehensive about global growth prospects in early 2020.”