Consumer spending dropped during the holiday season—just as the Fed hoped

US household spending fell for the second month, according to new data
Going out—in this economy?
Going out—in this economy?
Photo: Caitlin Ochs (Reuters)
We may earn a commission from links on this page.

Consumer spending was down 0.2% in December compared to the previous month, according to data released by the US Department of Commerce on Jan. 27. That compares with a decline of 0.1% in November. US consumer spending is what drives future economic growth.

The report shows household spending for goods was cut while spending on services increased slightly. Decreases within goods were widespread and led by gasoline as well as motor vehicles and parts. Within services, increases came largely from spending on housing, air transportation, and health care.

Notably, the personal savings rate rose 3.4%, which was the biggest monthly increase since July 2022. That comes as Americans have been increasingly relying on credit cards and savings for everyday purchases. The uptick in savings reflects Americans pulling back on spending.

The consumer spending data comes after GDP numbers released Jan. 26 showed the US economy growing at an annual rate of 2.9% in 2022. The economic growth was driven by consumer spending and government spending as a result of prior legislation, such as infrastructure spending and clean energy priorities, according to a Bank of America report.

Elsewhere, though, the slowdown in the US economy has been investment-led. The slowdown in housing and business spending, which are among the aspects of the economy most sensitive to interest rates, continues to reflect the effects of prior monetary tightening, the report said.

The Fed’s interest rate hikes appear to be having the desired effects of slowing the economy and taming inflation. Lower levels of consumer spending and higher levels of savings will achieve exactly that.

This latest batch of data is one of the last readings on the state of the US economy before the US Federal Reserve meets next week. The central bank is expected to raise the rate by a quarter of a percentage point, which would mark a slowdown in hikes.