(Bloomberg) -- US consumers unexpectedly pulled back on spending on goods like cars in January amid extreme winter weather, and a slowdown in services, if sustained, may raise concerns about the resilience of the economy.
Inflation-adjusted consumer spending fell 0.5%, marking the biggest monthly decline in almost four years after a robust holiday season. The drop in outlays was driven by an outsize decline in motor vehicle purchases, and drops in categories like recreational goods.
“Consumers took a breather in January. The key question is whether this is the onset of a more cautious consumer in 2025,” said Gregory Daco, chief economist for EY. “Spending on the services front was modest, so it may be a little bit more than just a post-holiday breather.”
The silver lining in Bureau of Economic Analysis data out Friday was the Federal Reserve’s preferred measure of underlying inflation, which offered some relief after a string of reports suggested price pressures are heating up.
The so-called core personal consumption expenditures price index, which excludes food and energy items, rose 0.3% from December. From a year ago, it increased 2.6%, matching the smallest annual increase since early 2021, the report showed.
Fed officials have indicated they need to see a meaningful easing in inflation before they begin lowering interest rates again, especially when they factor in how President Donald Trump’s policies will impact prices.
The S&P 500 opened lower and Treasury yields fell after the release, while the dollar remained stronger.
Core services prices — a closely watched category that excludes housing and energy — rose 0.2% from a month earlier. Goods prices excluding food and energy were up 0.4%, the most since early 2023. An alternative measure of overall core inflation stripping out imputed prices, which Fed officials have homed in on in recent months, increased 0.2%.
The PCE report showed a 0.9% increase in nominal incomes in January, thanks in part to an annual cost-of-living adjustment for Social Security beneficiaries. Inflation-adjusted disposable personal income rose 0.6%, helping push the saving rate to the highest level since June.
Looking ahead, it remains to be seen to what extent ongoing price pressures, combined with aggressive policy changes including new tariffs on imported goods, will weigh on the consumer. Friday’s numbers showed growth in services spending — which accounts for the bulk of personal consumption outlays — was also tepid last month. Spending on utilities, however, got a boost amid colder weather.
Gauges of consumer sentiment have dipped this month in large part due to worries that such levies will translate into higher prices. Long-term inflation expectations now stand at the highest level in almost 30 years, data from the University of Michigan showed last week.
What Bloomberg Economics Says...
“Growth of labor income has been cooling, a potential headwind for personal income going forward. Overall, though, inflation continues to move toward the 2% target, spending contracted, and we expect February payrolls (out March 7) to be weak. The economic trajectory still suggests that once the current rates pause is finished, the Fed’s eventual next move will be a cut.”
— Stuart Paul, Eliza Winger and Estelle Ou
To read the full note, click here
Separate data out Friday showed the US goods-trade deficit widened unexpectedly in January to a record as imports surged ahead of Trump’s promised tariffs.
--With assistance from Chris Middleton, Nazmul Ahasan, Liz Capo McCormick and Jonnelle Marte.
