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Sticky inflation and strong consumer spending: The Personal Consumption Expenditures (PCE) report for November showed strong spending and lower-than-expected inflation. The Fed is unlikely to cut rates in January. Today's PCE release should not change that. US consumers are driving economic growth. We expect this trend to continue into the new year. President-elect Donald Trump is likely to keep inflation above the Fed's 2% target in 2025 by imposing tariffs, loosening fiscal policies, and limiting immigration. The Fed’s Summary of Economic Projections of 18 December seem to agree with our sticky inflation call, predicting 2.5% headline and core PCE inflation next year.
Robust spending growth: The headline PCE inflation came in at 0.1% mom in November, below the consensus expectation of 0.2%. While this may seem like a soft inflation print, the year-over-year pace remained at 2.4% (7-month high), up from 2.3% in October. The Fed’s preferred inflation gauge – the core PCE deflator -- cooled to 0.1% mom (consensus was 0.2%), keeping the 12-month rate steady at 2.8% (3m annualized trend at 2.5%). Powell’s supercore (services ex energy/housing) was up 0.2% mom in November and the yearly pace remains high at 3.5%. The FOMC members will need to see sustained progress on inflation with no further tightening in labour market before even considering cutting rates. On a volume basis, personal spending rose 0.3% mom (consensus was also 0.3%) with goods doing the heavy lifting at 0.7% while services were only up 0.1%. Households increased their spending on durable goods by 1.8% mom in November (second highest since reading since January 2023), likely anticipating higher prices due to future tariffs. Personal incomes grew by 0.3% mom in November, after a strong 0.7% increase in October (revised up from 0.6%). Even after adjusting for inflation and taxes, income growth was still strong at 0.2% mom. With income growth trailing behind consumption growth, the savings rate ticked down from 4.5% in October to 4.4%. The pre-pandemic norm average for savings rate is around 5.5% but it is unlikely that we see a mean-reversion in the near-term. Services spending recorded its smallest gain this year, with food services & accommodation falling the most in two years (-0.6% mom). But this was not a surprise since we have already seen it coming from the November retail sales report. Wages & salaries (0.6% mom in November and 0.5% in October) continue to drive personal income growth, posing an upside risk to services inflation.
More positive news: The US economy shows no sign of weakness. The PCE release was not the only tell. We received some strong macro data this week. Building permits jumped from 1.42 million (annualized rate) in October to 1.51 million in November, indicating higher residential investment in 2025. The real GDP growth for 2024Q3 was revised up from 2.8% to 3.1% and the Atlanta Fed is looking at another 3%+ growth for the current quarter. Initial and continuing claims both ticked down as layoffs remain low. The Conference Board’s Leading Economic Indicator (LEI) increased by 0.3% mom in November, and this was the first positive print since February 2022. Existing home sales came in at 4.15 million (annualized rate), up from 3.96 million in October despite the elevated mortgage rates. From housing to labour market to GDP, the economy is showing strong signs, and this does not look like an economy where the Fed should cut rates. Although not a voter in 2025, San Francisco Fed’s Mary Daly said just a few hours ago that the “recalibration phase now over,” meaning that she sees no reason for rate cuts labour market shows serious cracks or inflation drops sharply.
Major tailwinds to consumer spending: US consumers have defied expectations since the Fed started tightening rates in March 2022. We expect this trend to continue. While excess savings from stimulus payments have been spent, strong income and wage growth continue to drive household consumption. Although credit card debt spiked in October (up 14% month-over-month, the highest since June 2022), household balance sheets remain healthy. The debt service ratio is 11.5%, lower than the pre-pandemic average of 11.7%, even though rates have nearly quintupled. Households have locked in low-rate debts they do not need to refinance anytime soon. In addition, households now have record exposure to the stock market, holding 30% of their financial assets in equities—the highest share since 1970. As the US stock market continues to outperform, households feel wealthier and increase their spending. On top of these factors, we also expect tax cuts in 2025.
Atakan Bakiskan
US Economist
+44 20 3207 7873
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