U.S. Consumer Spending Rises in December, Saving Rate At Lowest Since 2005

By Harriet Torry and Sharon Nunn Features Dow Jones Newswires

U.S. consumers increased spending in the final month of last year as their incomes improved, and they saved at the lowest rate since 2005.

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The 2.4% saving rate in December hit a new low for this expansion, as high asset prices and the prospect of lower taxes enticed consumers to spend more. The rate was last lower in September 2005.

Personal consumption expenditures, a measure of household spending on everything from cellphones to groceries, increased a seasonally adjusted 0.4% in December from the prior month, the Commerce Department said Monday.

Personal income--reflecting Americans' pretax earnings from salaries, investments and other sources-- rose 0.4% in December. Economists surveyed by The Wall Street Journal had forecast a 0.5% rise in spending and a 0.3% rise in incomes.

Low unemployment, the prospect of lower taxes and the rising values of houses and stocks have made households feel more financially secure and willing to spend in recent months. November's spending was revised up to an 0.8% increase from a previously reported 0.6% gain. Spending rose 0.3% in October.

Americans' rate of saving is at its lowest since September 2005. The personal saving rate -which measures the difference between what households earn and what they spend on goods, services and repaying loans- was 2.4% in December, down from a revised 2.5% in November.

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While a low saving rate suggests consumers feel optimistic enough about their financial prospects to put aside less for a rainy day, it also means households have a smaller financial cushion should an economic downturn hit.

Consumer spending accounts for more than two-thirds of U.S. economic output, and Monday's report suggests momentum was strong at the close of 2017. The latest spending data shows increased outlays in December were driven by spending on durable goods and services. Personal consumption expenditures rose 4.5% in 2017, the largest increase since 2011.

For the final quarter, strong spending by Americans and businesses were a key driver of economic growth. The Commerce Department said Friday that gross domestic product, the value of goods and services produced in the U.S., rose at a 2.6% annual rate in the fourth quarter.

Monday's report showed a key gauge of prices was weak in December, presenting the Federal Reserve with a mixed inflation picture on the eve of its policy meeting.

The price index for personal consumption expenditures, the Fed's preferred inflation measure, rose 0.1% from November and was up 1.7% from a year earlier. After touching the Fed's 2% annual target in February 2017, inflation has lagged that goal for ten consecutive months.

Excluding volatile food and energy costs, prices rose 0.2% in December from November, and increased 1.5% from a year earlier.

The latest below-target reading deepens the Fed's inflation conundrum. The central bank meets on Tuesday and Wednesday and is widely expected to maintain the target for the federal-funds rate, charged on overnight loans between banks, at its current rate between 1.25% and 1.5%.

As the U.S. economy has strengthened in recent months, Fed officials have been gradually raising short-term interest rates, but they remain focused on boosting still-weak inflation. Officials have penciled in three quarter-percentage-point rate increases for 2018.

The Commerce Department report on personal income and spending can be accessed at http://www.bea.gov/newsreleases/rels.htm.

Write to Harriet Torry at harriet.torry@wsj.com and Sharon Nunn at sharon.nunn@wsj.com

(END) Dow Jones Newswires

January 29, 2018 08:45 ET (13:45 GMT)