Personal income and spending January 2025

Shadow of a doubt
 

• While personal income surged 0.9% in January on moderate wage gains and strong social benefits led by Social Security checks, personal outlays fell 0.2% month over month (m/m) as consumers took a breather following a robust holiday season. The resulting 1.1 percentage point (ppt) surge in the personal saving rate is noteworthy, as it could indicate the onset of a precautionary savings by households. It’s too early to conclude whether that is the case, but this will be something to monitor as tariff threats, federal government layoffs and tax uncertainty loom.
  
  
• Adjusted for inflation, disposable income rose 0.6%, but consumer outlays fell 0.5% as elevated prices and rates along with poor weather limited consumer appetite. While consumer spending remains on a firm 3.0% year over year (y/y) trend, its main pillar has weakened significantly with real disposable income only up 1.8% y/y — the weakest pace since December 2022.
  
  
• On the inflation front, the headline and core personal consumption expenditures (PCE) deflators rose 0.3% m/m — in line with expectations, and less than initially feared after the Consumer Price Index (CPI) surge. Headline PCE inflation ticked lower to 2.5% y/y while core inflation eased 0.3ppt to 2.6% y/y — near its lowest since March 2021. Short-term inflation dynamics remained encouraging with the three-month and six-month annualized core PCE inflation gauges at 2.4% and 2.6%, respectively.
  
  
• Looking into the details, inflation-adjusted spending on durable goods plunged 3.4% on a 6% decline in autos and notable decreases in spending on furniture and furnishings as well as recreational vehicles. This may reflect more cautious spending following a strong holiday season as well as poor weather disrupting sales. Outlays on nondurable goods fell 0.8%, led lower by reduced grocery purchases, as spending on clothing and gas rose modestly. Meanwhile, services outlays only increased 0.1% as moderate gains in transportation services and restaurants and bars were partially offset by a pullback on leisure activities.
  
  
• Looking ahead, we foresee real consumer spending growth around 2.5% in 2025, following a 2.8% advance in 2024. The average will mask a gradual moderation in spending trends with consumption momentum likely to ease from 3.2% y/y in Q4 2024 to below 2% y/y in Q4 2025.
  
  
• We foresee headline PCE inflation gradually easing in the spring (likely around 2.2% in March), but ending the year close to current levels, around 2.5% y/y in Q4 2025. Core PCE inflation is likely to follow a similar trajectory with further easing in the early months of 2025, but ending the year around 2.5% y/y in Q4 2025.
  
  
• We believe data-dependent Fed policymakers will find comfort in a winter pause. A wait-and-see approach will likely favor only two Fed rate cuts in 2025, in June and December.