WASHINGTON – U.S. consumers kept their spending flat in December and instead boosted their savings rate to the highest level in three years.
Consumer spending was unchanged in December after rising 0.5 per cent in November, the Commerce Department reported Monday. Incomes increased 0.3 per cent, matching November’s gain.
Higher incomes and flat spending pushed the savings rate to 5.5 per cent of after-tax income in December. That was the highest level since December 2012.
The latest numbers underscore how cautious consumers were in the final three months of the year. Weak spending gains dragged overall U.S. economic growth, which slowed to a meagre 0.7 per cent rate in the fourth quarter.
“Spending momentum slowed as 2015 drew to a close and enters the year on a weaker note,” said Jennifer Lee, senior economist at BMO Capital Markets.
But she noted that the big rise in personal savings could be setting the stage for stronger spending growth in 2016.
Economists also expect that an improving jobs market will fuel spending momentum and help push economic growth back above 2 per cent in the current January-March quarter.
An inflation gauge preferred by the Federal Reserve fell by 0.1 per cent in December, reflecting further declines in energy prices. Over the 12 months ending in December, this price index is up 0.6 per cent. That was the largest 12-month gain since December 2014 but remains well below the Fed’s 2 per cent target for inflation.
The flat reading on spending in December reflected a warmer-than-normal December that reduced demand for winter clothing. In addition, analysts blamed a wetter-than-normal month for holding back spending on autos. Demand for autos and other durable goods fell by 0.9 per cent in December, while demand for nondurable goods such as clothing also dropped 0.9 per cent. Demand for services including utilities rose 0.4 per cent.
At its meeting last week, the Fed left a key interest rate unchanged six weeks after boosting it by a quarter-point, the first rate hike in nearly a decade.
Many economists believe that the recent turbulence in financial markets, weakness in the U.S. and global economies and absence of inflation pressures may prompt the Fed to move slowly. They say the Fed is likely to reduce the number of rate hikes it makes this year from four to perhaps no more than two.