Is Consumer Spending Slowing?
Perhaps, but so far this does not yet seem to be showing up as slower inflation. Plus: more on the latest GDP data.
The dollar value of U.S. consumer spending has been rising steadily at a yearly rate of about 6% since mid-2022. That has helped keep prices growing somewhat faster than the 2% yearly goal favored by Federal Reserve officials. But the composition of this spending has been shifting over the past year or so, with an increasingly large growth contribution coming from categories where spending is “imputed”, instead of based on actual transactions and observed prices. Strip that out, and nominal spending seems to have been slowing. Yet this does not seem to be translating into slower inflation, with core consumer goods prices accelerating notably over the past few months.
What follows is a rundown of these issues, as well as a quick look at a few other special topics related to the latest data, such as the stance of fiscal policy and the statistical discrepancy between Gross Domestic Product (GDP) and Gross Domestic Income (GDI).
Non-Market-Based Mirages
While the month-to-month changes can be volatile, longer-term changes in nominal Personal Consumption Expenditures (PCE) have been remarkably stable since the second half of 2022.
PCE is often generalized as “consumer spending”, but that is not quite the same as actual out-of-pocket spending by households. This is usually an improvement. PCE includes all spending on healthcare, including spending covered by insurance, which would not be captured properly by measures that only look at direct expenses. PCE also includes net spending by nonprofits on behalf of households.1 Since the end of 2023, surging spending on “professional advocacy services”, a category that includes political campaigns, accounts for 7% of the total growth of PCE in that period. That is clearly a form of consumption that creates jobs and incomes.
But there is also a large category of spending that is “imputed” despite no transactions taking place and no market prices to observe. Most, although not all, of this imputed spending is in financial and insurance services.
The gap between the interest you should be earning on your deposits and the interest your G-SIB is paying? That is the fee you pay for the privilege of having a bank account.2 Pension funds that pay less to beneficiaries than they earn from investment income? That is the fee you pay to the pension administrator. Mutual fund and ETF fees that rise and fall proportionately with the value of assets under management? Also a form of imputed consumption. And most insurance spending is also imputed based on estimates of the underlying value of the coverage.
The Bureau of Economic Analysis (BEA) produces separate “market-based” aggregates for PCE. Overall, market-based PCE accounts for almost 90% of total PCE. Within financial and insurance services, however, almost 90% of spending is imputed, and therefore not included in market-based PCE. About half of total non-market PCE is attributable to finance and insurance, and about half of the rest is net spending by nonprofits.
Intriguingly, more than 40% of the growth in real PCE in 2024Q1 is currently attributed to finance and insurance plus net nonprofit spending. That is the highest share coming from this subset of (mostly) imputed categories since 2011.
In nominal terms, rapid growth in non-market-based PCE (16% annualized) has offset slowing growth in market-based PCE, such that the headline growth rate has remained stable around 6%. The current pace of growth in non-market-based PCE is much faster than what would be required to “catch up” from the slowdown in 2023.
This might suggest that inflationary pressures would be easing, but that does not (yet) appear to be the case.