Consumer spending dipped in November, even as inflation cooled

When it comes to the state of the consumer, the contradictions continued in November and December.

Consumer spending slowed down, even as prices fell. New home sales ticked up, while existing home sales fell. Manufacturers cut back orders, even as consumer sentiment rose to end the year.

Here’s a look at the flurry of economic data released for November and December to end the month, and what it says about the economy and the consumer:

Consumer spending increased 0.1% over October, down from a 0.9% increase the month prior, according to the latest Personal Income Expenditures report. This slowdown came as the Bureau of Economic Analysis showed disposable income rose 0.4%, compared with 0.7% the prior month. Meanwhile, personal savings as a percentage of disposable income was 2.4%, up slightly from 2.2% the month prior.

What it says: A decrease in spending hitting just as the holidays arrive is likely to bring cause for concern, even as retailers like Nike reported record Black Friday-Cyber Monday spending this week. To be sure, there are a number of factors at play, as the data is affected by falling gas prices and rising services inflation, since the spending report is not adjusted for price changes. Nevertheless, the pullback of growth in consumer spending was underscored by a decrease in spending on goods of $59.5 billion, which was a sharp turnaround from last month’s $71.8 billion increase. Following November retail sales data that showed uneven spending, holiday season results will be closely watched for any signs of softening spending.

Inflation increased 5.5% year-over-year and just 0.1% month-over-month, according to the PCE Price Index. This marked a deceleration from October, when prices rose 6.1%. The inflation rate excluding food and energy rose 4.7% from a year ago, which was also down from 5% in October, but roughly on par with the 4.7%-4.9% range from the summer.

What it says: The annual number will add to evidence that inflation is cooling. The PCE, which is the price gauge watched most closely by the Federal Reserve, has followed the Consumer Price Index in showing slower growth over the last two months. It’s still well above the Fed’s goal of 2%, but evidence of progress is beginning to emerge. Nevertheless, Fed officials have said interest rate hikes are likely to continue, even as they pulled back the size of the increase to 0.5% in December.

Durable goods orders decreased 2.1% on a monthly basis in November, according to the US Commerce Department. This was a marked turnaround following a 0.7% increase in October. The decrease, which was the first in four months, was driven by a decline in orders of transportation equipment. Durable goods describe orders from manufacturers for products that are designed to last more than three years.

What it says: This is a notable slowdown in activity. But keep this in mind: The durable goods metric is a broad-based measure of orders, covering everything from military equipment to washing machines. As such, any movement here is typically interpreted as an indicator of the economy as a whole, rather than a direct sign for consumer goods. Still, there are some consumer products included such as cars and appliances, and any slowdown in the economy could eventually affect consumers, as well. This is especially notable after retail sales data pointed to a pullback from larger-ticket purchases. People may keep spending amid inflation, but it is the bigger-discretionary purchases that take a backseat when food and fuel are more expensive.

Consumer sentiment for December rose 5% above November to end the year on a slightly sunnier note, according to a final reading from the University of Michigan Survey of Consumers. While sentiment is 15% below its level of a year ago, the recent month’s data still showed an improved outlook on inflation. Notably, short-run inflation expectations improved from 4.9% to 4.4% over the month, which was the lowest reading in 18 months.

What it says: While spending was down for November, the sentiment numbers for the following month show there’s hope for a better December, which doubles as the critical holiday shopping month for retailers. The data suggests the slowing growth of inflation is also beginning to filter to consumers, but it remains a volatile environment heading into 2023.

“While the sizable decline in short-run inflation expectations may be welcome news, consumers continued to exhibit substantial uncertainty over the future path of prices,” wrote UMich Survey of Consumers Director Joanne Hsu.

Home sales data released last week sent mixed signals:

New home sales were up 5.8% on a monthly basis in November, while falling 15.3% on an annual basis, according to the US housing and commerce departments. The median price for new homes was $471,200, while was down from $493,000 the previous month.

Existing home sales, meanwhile, fell 7.7% on a monthly basis in November, falling for the 10th straight month, according to the National Association of Realtors. The median price for existing homes was $370,700, an increase of 3.5% from November 2021.

What it says: While the new home sales data was likely welcomed, the housing market continues to cool off. This is one area of the economy where the Federal Reserve’s actions to raise interest rates is being felt most immediately, as mortgage rates are directly affected by the more expensive borrowing costs.

"In essence, the residential real estate market was frozen in November, resembling the sales activity seen during the COVID-19 economic lockdowns in 2020," said NAR Chief Economist Lawrence Yun, in a statement. "The principal factor was the rapid increase in mortgage rates, which hurt housing affordability and reduced incentives for homeowners to list their homes. Plus, available housing inventory remains near historic lows."