Soft December for spending, income, inflation. Slowdown is the fear for 2023

One day after the GDP report showed strong economic growth for Q3 as a whole, we got the always-key income and spending report for December, and it indicated some changing economic trends as 2022 wrapped up.

U.S. consumer spending fell for a second straight month in December, putting the economy on a lower growth path heading into 2023, while inflation continued to subside, which could give the Federal Reserve room to further slow the pace of its interest rate hikes next week.

The report from the Commerce Department on Friday also showed the smallest gain in personal income in eight months, in part reflecting moderate wage growth, which does not bode well for consumer spending. Though the drop in spending was mostly in the goods sector, services outlays essentially stalled.....

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, dropped 0.2% last month. Data for November was revised lower to show spending slipping 0.1% instead of gaining 0.1% as previously reported. Economists polled by Reuters had forecast consumer spending dipping 0.1%.

That's not a good sign if the consumer is slowing down, especially since those figures are before inflation is figured in. And it's been a general leveling of inflation-adjusted spending growth since the economy bounced back after COVID vaccines became widespread around March 2021, with declines in the last 2 months.

However, I'll note that the same "decline" happened at the end of 2021, which makes me wonder if models haven't caught up to the fact that Holiday Shopping Season isn't the major boost that it used to be. I hope that is also the case for the drop in real spending for food services and accomodations at the end of 2022, and that it is not a harbinger of a wider spending slowdown.

Inflation was also lessening, indicating that we are in a much different situation than we were in the inflation-laden first half of the year.

The personal consumption expenditures (PCE) price index edged up 0.1% last month after rising by the same margin in November. In the 12 months through December, the PCE price index increased 5.0%. That was the smallest year-on-year gain since September 2021 and followed a 5.5% advance in November.

Excluding the volatile food and energy components, the PCE price index gained 0.3% after climbing 0.2% in November. The so-called core PCE price index rose 4.4% on a year-on-year basis in December, the smallest advance since October 2021, after increasing 4.7% in November.

And it looks even better when you look at inflation over the last few months - as a top Biden Admin economic advisor points out, we are nearly down to the alleged Fed target of 2%.

Clear deceleration in both, w headline back to around 2-yr ago pace. Core down by 2 ppts over past few months, at 2.9% in Dec (again, 3-mnth ann change).
I find these next figures helpful in getting a bead on inflation's dynamics. They're 12, 6, 3, 1 mnth rates, all annualized.

— Jared Bernstein (@econjared46) January 27, 2023

This report gives more evidence to me that a lot of the COVID-era weirdness have been shaken out of the economy, and now we are back toward a pre-COVID normal (with some changes in service methods). We should have a Fed that reacts accordingly, and stops trying to tighten money in order to slow an economy and inflation that's already slowed down.

In fact, the lower numbers of November and December makes me anxious to see January's data, to see if the slowdown continues, or is just a seasonally-adjusted blip. If January comes in soft, it might be time to get off of INFLATION WATCH and do more to continue our strong jobs market and decent income growth, before we get into full-fledged recession.