U.S. Personal Income & Spending (January 2025)

U.S. Consumer Spending Starts the Year on a Weak Footing, While Income Growth Picks Up

• Personal income rose strongly in January, increasing by 0.9% month-over-month. 
• Meanwhile, consumer spending took a breather. Following a streak of strong gains in a prior four months, nominal spending edged lower by 0.2% m/m. 
• The volume of spending (which excludes the impact of inflation) pulled back more strongly, declining by 0.5% m/m. The volume of spending on goods declined 1.7%, with lower spending on both durable and non-durable goods. Spending on services was little changed, edging up by 0.1% m/m.   
• The Fed's preferred inflation metric, the core PCE price deflator, rose 0.3% m/m, up slightly from the 0.2% increase seen in December. In year-over-year terms, core PCE inflation fell to 2.6% from 2.9% in the prior month thanks to favourable base-year effects.
• Strong income gains alongside soft spending pushed the savings rate up to 4.6% from 3.5% in the prior month. It is notable that the same large increase in the saving rate happened in January of 2024, followed by a continuous decline throughout the year.

Key Implications

• Given the drop in retail sales in January, the soft print on consumer spending in today’s report comes as no surprise. As we mentioned previously, one-off factors, such as the wildfires in California and inclement weather, may have contributed to the slower pace of spending at the start of the year (see report). This suggests a potential bounce-back in spending in the coming months. Still, the slower start to the year indicates that growth in real consumer spending in Q1 is likely to come in around to 2.0-2.5% (annualized), down from our prior estimate of 3.0%.
• Broadly speaking, U.S. households remain in good financial shape, supported by a still healthy labor market and a significant wealth cushion. As long as this remains the case, we expect real consumer spending to stay resilient this year, with growth moderating to around 2%. However, given the rapid policy changes, the outlook remains fraught with risks. Consumer sentiment has weakened noticeably in recent months, weighed down by policy uncertainty. Consumers also remain highly sensitive to inflation, and concerns over the impact of tariffs have caused a significant increase in year-ahead inflation expectations in the latest consumer confidence surveys.