Consumer resilience

With mortgage rates trending down since Halloween and hitting their lowest since May 2023, housing got a bit of a bump in December. New home sales rose 8%, and mortgage applications climbed for the third week running. Still-low weekly jobless claims and steady gains in personal income underpin consumer resilience, as shown by strong spending during December and in the fourth quarter.

Though down from a gain of 4.9% in the third quarter, the economy grew by 3.3% in the fourth, led by increases in consumer spending, exports, government spending and fixed investment. Consumers increased spending on services (primarily food service), accommodations and health care, but also on goods, such as pharmaceutical products, recreational goods and vehicles. Vehicle sales hit their highest rate since April. Importantly, the Personal Consumption Expenditure index within the GDP report rose 1.7%, down from 2.6% in third quarter, and excluding the more volatile food and energy components, it was unchanged at a rise of 2.0%. 

In a separate report on inflation, the closely watched PCE deflator rose 0.2% in December and 2.6% over the last year, but the core measure rose only 2.9% in 2023, down from 3.2% in the prior month. At the risk of drowning in data details, this core rate fell to 1.9% over the last six months, below the Fed’s 2% inflation target. Personal income rose 0.3% in December, down from 0.4% in November, and personal spending rose 0.7%, drawing down consumers’ savings in the process. 

With a solid consumer foundation going into 2024, and inflation well-behaved, focus shifts to the upcoming Federal Reserve meeting on January 31. Markets still look for more than five fed funds rate cuts from the Fed by year-end, in spite of Fed attempts to rein in enthusiasm. Time and data will tell.