Surprising Fourth Quarter Economic Report: Consumer Spending and Inflation Trends

In the fourth quarter, consumer spending increased by 3.3%, accounting for two-thirds of GDP. The growth was driven by higher spending on health care and financial services, although spending on goods was revised lower. Nonresidential investment figures also strengthened, with upward revisions to spending on structures, intellectual property, and equipment.

The personal consumption expenditures price index, the Federal Reserve’s preferred inflation metric, rose at a 1.8% annual rate in the fourth quarter. This was the lowest since 2020. Excluding food and energy, the index increased by 2%, slightly less than the previous estimate. Adjusted pre-tax corporate profits saw a 4.1% increase, the largest since mid-2022. After-tax profits as a share of gross value added for non-financial corporations remained high at 15.1%.

Recent earnings reports have shown that publicly-traded companies are experiencing higher gross margins due to relief on input costs. However, this isn’t necessarily translating to lower prices for consumers. This trend has contributed to investor optimism, as the S&P 500 is on track for its fifth consecutive month of gains. President Joe Biden has highlighted strong corporate earnings as a sign of companies profiting off of consumers with high prices, especially in grocery stores.

Recent economic indicators suggest that consumers may be becoming more selective in their spending, following years of pent-up demand-driven consumption. Data on personal consumption expenditures for February are expected on Friday. The trajectory of inflation and the labor market will play a crucial role in determining how long consumers can continue to support economic growth. Another report showed that continuing applications for US unemployment benefits rose to 1.82 million in the week ending March 16, the highest level in nearly two months.