Economic Resilience: Consumer Spending on the Rise
The US economy is showing remarkable strength, with consumer spending increasing in November across a broad range of goods and services. This surge in spending is driven by strong demand, solid income growth, and the wealth effect from higher portfolio values.
Robust Consumer Demand
Consumer spending, which accounts for over two-thirds of US economic activity, rose 0.4% last month, following a downwardly revised 0.3% gain in October. This increase was led by new motor vehicles, recreational goods and vehicles, financial services, and insurance, among other categories. Spending on recreation services, healthcare, clothing, and footwear also saw significant growth.
Inflation Under Control
The good news on inflation is a welcome respite after a series of warmer readings. The personal consumption expenditures (PCE) price index rose 0.1% last month, with the core PCE price index climbing 0.1%, the smallest rise since May. In the 12 months through November, the PCE price index advanced 2.4%, while core prices increased 2.8%.
Fed’s Cautious Approach
The Federal Reserve, taking note of the economy’s resilience and still-high inflation, has projected fewer interest rate cuts in 2025 than previously anticipated. The central bank cut its benchmark overnight interest rate by 25 basis points to the 4.25%-4.50% range, citing uncertainty over policies from the incoming administration.
Labor Market Strength
The labor market remains robust, with low layoffs and strong wage growth underpinning consumer spending. Household balance sheets, buoyed by high stock market and home prices, are also driving spending. However, economists caution that lower-income consumers are under financial pressure, and it’s mostly middle- and higher-income households that are benefiting from wage gains and wealth effects.
GDP Growth
The economy is expected to maintain its momentum, with the Atlanta Fed forecasting gross domestic product increasing at a 3.2% rate in the fourth quarter. This follows a 3.1% annualized growth rate in the third quarter, driven by robust consumer spending.
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