Consumer spending, adjusted for inflation and adjusted for seasonal factors ticked down by 0.3% in February, after a huge spike in January that had followed drops in December and November, and a big jump in October, according to data by the Bureau of Economic Analysis today.
Tamp down on that noise? The gray insert shows the details of this baffling noise that makes the underlying trends harder to see. But we’ll cut out that noise in a moment to see those trends.
Compared to February a year ago, consumer spending, adjusted for inflation, rose by 2.5%. This is solid growth.
Overall consumer spending, adjusted for inflation, when seen as a three-month moving average (which smoothens out the month-to-month zigzags), has been on a solid uptrend: Americans are doing what they do best: spend money, and they’ve been outspending inflation just fine.
The three-month moving average of “real” consumer spending for February was up 2.4% year-over-year.
By comparison, during the Good Times in 2015 through 2019, when interest rates were a lot lower, “real” consumer spending grew by 2.9% on average.
So growth recently has been a little slower than during the Good Times. But it’s still amazingly strong, despite inflation and the highest interest rates in many years.
Spending on services, adjusted for inflation, and expressed as a three-month moving average has been rising at a steady but faster pace. In February, it rose 3.3% year-over-year.
This growth exceeds the five-year average in 2015 through 2019 of 2.3%, amid what may still be ongoing revenge spending on travel, personal care, and other services that were curtailed during the pandemic.
Services accounted for 61.8% of total consumer spending. It includes housing, utilities, insurance of all kinds, healthcare, travel bookings, streaming, subscriptions, entertainment, repairs, cleaning services, haircuts, etc.
Spending on durable goods, adjusted for inflation, still grew by 2.7% year-over-year, even though the stimulus moneys have long run out. It seems, Americans aren’t about to give up buying stuff. Durable goods include new and used vehicles, appliances, furniture, electronics, tools, etc.
The three-month moving average in February grew at a slower but more realistic rate (+2.2%) than February by itself year-over-year (+2.7%):
Spending on nondurable goods, adjusted for inflation, has slowed quite a bit and is now barely growing, and in February was up less than 1% from a year ago. Nondurable goods are dominated by food, fuel, apparel, shoes, and household supplies.
The three-month moving average was actually down a tad (-0.3%) from a year ago. This is where food and fuel inflation whacked Americans in the first half of last year. But note the recent upticks in the trend from the low points last summer: Over the last six months, the three-month moving average rose by 0.7%
The Trends: Quite amazing, given how much interest rates have jumped.
Consumers have been outspending inflation, largely due to the strength in spending on services – including revenge travel? – while durable goods spending growth is still holding up. Spending on nondurable goods flatlined last year but recently has started to rise again.
Consumers are in no mood to slow down, they’re out there making money and they’re spending it, despite the higher interest rates.
And it seems they’re starting to live with inflation, they hate it obviously when they’re confronted with it, and they complain about it under their breath, and they’re trying to dodge it, but life goes on, and this inflation is now part of it, and consumers are adjusting to it, and spending goes on.
The next test for consumers: the banking turmoil.
So far, consumers have passed all the tests: They got whacked over the head by inflation, then they got whacked over the head by higher interest rates, then they keep hearing stories about mass layoffs, and asset prices have fallen from the peak, and a bunch of them have plunged, but nothing has slowed down consumers so far.
In March, which is not reflected in the spending figures here, consumers got whacked over the head by a new thing: worries about the banks and worries that credit conditions might tighten.
Fed officials from Powell on down have suggested the consumers will cut back because of these worries and the tightening credit conditions.
And it could be that this banking turmoil is finally what will cause consumers to slow down their spending, but the banking turmoil is already subsiding, and consumers with deposits below the FDIC limits – the vast majority of consumers – weren’t worried about it anyway.
So it remains to be seen if this is just another thing that consumers will just go ahead and blow off too. And that would be a hoot, if even the banking crisis cannot slow down those consumers.
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