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Consumer spending, inflation cool in December, as sentiment perks up
U.S. GDP rose 2.9% in the fourth quarter of 2022.
While there are plenty of gloomy economic forecasts floating around, data paints a mixed picture of the U.S. consumer economy as 2023 gets underway.
Inflation is cooling off, but consumer spending is pulling back, a key report from December shows. Meanwhile, consumer sentiment is improving and the economy is showing signs of growth, but plenty of uncertainty remains.
Here’s the data that was released this week:
Personal Consumption Expenditures: Slowing spending, cooling inflation
Consumer spending fell 0.2% in December, as shoppers spent less on goods, even as they spent more on services, according to the Personal Consumption Expenditures data report issued Friday.
There are signs that the fall may be driven by inflation. A primary of the goods decrease was gasoline, where prices are coming down. Housing, where inflation is going up, was a driver of the increase in services. Yet the decreases in goods were “widespread,” the U.S. Bureau of Economic Indicators noted.
The PCE’s measure of Inflation increased 0.1% from November, marking the second straight month of slower growth after months of higher prices.
The annual inflation increase also slowed to 5%, down from 5.5% the month prior. PCE inflation, which is the pricing measure preferred by the Fed, is continuing to fall in a similar fashion to the more widely-used Consumer Price Index.
Core inflation, which is the inflation measure that leaves out the more volatile food and energy categories, slowed to 4.4%. That was its lowest level since October 2021.
The report offers a textbook look at how the Federal Reserve’s monthslong campaign to hike interest rates are playing out across the economy. The Fed’s main goal is to cool inflation, and prices are coming down. However, the Fed’s monetary policy tools also have the side effect of cooling demand, which leads to a decrease in consumer spending that is also evident.
The report comes days before the Fed will consider a further interest rate hike next week. Officials have signaled that they will continue the increases to fight inflation, but will consider whether to keep scaling back the size of the rate hike. The 0.5% increase in December was smaller than the 0.75% increases delivered at the four prior meetings.
The pullback in consumer spending was also evident among consumer goods companies that issued earnings reports this week.
3M, which makes Post-it notes, said organic sales fell 5.7% for the year.
“The slower-than-expected growth was due to rapid declines in consumer-facing markets, such as consumer electronics and retail, a dynamic that accelerated in December, as consumers sharply cut discretionary spending and retailers adjusted inventory levels,” said CEO Mike Roman.
GDP: Second straight quarter of growth
U.S. GDP: 2019-2022 (US Bureau of Economic Analysis)
The Fed’s moves bring with them the risk that the economy could tip into recession if demand cools off too much. Yet the overall economic data for the fourth quarter signaled to the positive.
Gross domestic product, which is a broad-based measure of economic activity, rose 2.9% in Q4 from the prior quarter, the BEA reported on Thursday.
Consumer spending, which is about two-thirds of GDP, was a key driver of the increase, as it rose 2.1%. Notably, spending on goods was up by 1.1% in the holiday quarter after three straight quarters of decline.
“We continue to see consumption as having tailwinds from tight labor markets, high levels of excess saving, and falling gasoline prices, among other factors,” Bank of America Economist Michael Gapen wrote in a research note.
The report also points at another trend of 2022: People returned to spending on experiences and services as pandemic restrictions were lifted. However, that may be cycling out. The increase in goods spending and a corresponding slowdown in services “suggests the rotation of household spending back toward services may be nearing its end, though we hesitate to say it is completed,” Gapen wrote.
It marked a second straight quarter of economic growth to end 2022, showing that the economy turned around from two straight quarters of decline to begin the year.
Inflation also cooled for the quarter. The PCE Price Index rose 3.2% for the quarter, compared with an increase of 4.3% in the third quarter.
Consumer sentiment: Improving for the second straight month
U.S. consumer sentiment, 2013-2023
U.S. consumer sentiment rose 9% in January from the prior month, continuing a climb of the doldrums that reached historic lows at inflation’s height over the summer, according to the University of Michigan.
In particular, consumers’ view of current economic conditions rose 15%. With strong incomes in a tight job market and falling prices as inflation cools, people feel better about their finances and would be more likely to make bigger purchases, UM wrote.
People are also looking for inflation to continue to cool. The year-ahead inflation expectation of 3.9% was the lowest level since April 2021. Yet declines should be viewed as “tentative,” since uncertainty remains, UM said.
While sentiment is improving, it is still at historic lows. Economic volatility remains, so the good signals shouldn’t necessarily be interpreted as outright optimism.
“There are considerable downside risks to sentiment, with two-thirds of consumers expecting an economic downturn during the next year,” wrote University of Michigan Survey of Consumers Director Joanne Hsu. “Notably, the debt ceiling debate looms ahead and could reverse the gains seen over the last several months.”
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Kellogg's takes inspiration from employees, Latin in snacks rebrand
Kellanova is now the parent of Pringles, Cheez-Its and Pop Tarts.
Kellogg Company's snacks business is now Kellanova. Here are a few finer points about how the forthcoming parent of Cheez-Its and and Pop-Tarts arrived at the new name.
Last year, Kellogg announced plans to split its business into multiple companies.
Now, one company will have North American cereals like Frosted Flakes, Froot Loops and Rice Krispies under the WK Kellogg Co banner.
Another will have snacks like Pringles, North American frozen foods such as Eggo and plant-based brands like MorningStar Farms.
This week, Kellogg announced that the snacks business has a new name: Kellanova.
Here are the strategies that Kellogg employed that led to this name:
- Ask the employees: Kellogg Company asked employees for input on the name, and received 4,000 suggestions from 1,000 employees.
- Listen to the results: 20% of the employees suggested a variation of the W.K. Kellogg name, while other employees suggested that the name include "nova."
- Go to the root: "Nova" comes from the Latin word for new. CEO Steve Cahillane said it "signals our ambition to continuously evolve as an innovative, next generation, global snacking powerhouse."
As The Wall Street Journal reports, this is just the latest new company name to take a Latin root in recent years, as Kellanova joins GE Vernova, Mondelez and Altria. It's also among a number of spinouts being completed by corporations, joining GSK spinoff Haleon, J&J's Kenvue and a forthcoming company that will spin out of 3M.
Even with a name that emphasizes moving forward, Kellanova is keeping one element that is familiar: The logo still has the iconic cursive K. It will even get the boldly simple stock ticker symbol "K" to go along with it.
Even the WK Kellogg Co is combining the past and future. The company is seeking to position itself as a "117-year-old startup," even as it draws on the name and signature of the Kellogg's founder. There's even a more subtle hint about an unwritten chapter: The "Co" doesn't have a period.
To get to the future, you need to bring along a bit of the past.