Strong Economic Growth Continues to Drive Consumer Spending, Despite Lower Spending on Goods

Economic growth continued to drive consumer spending in the fourth quarter, with a 3.3% increase accounting for two-thirds of GDP. This growth was fueled by higher spending on health care and financial services, despite lower spending on goods. Nonresidential investment also strengthened, with upward revisions to spending on structures, intellectual property, and equipment.

The Federal Reserve’s preferred inflation metric, the personal consumption expenditures price index, rose at an annual rate of 1.8% in the fourth quarter, the lowest since 2020. Excluding food and energy, the index increased by 2%, slightly below expectations. 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, but 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.

Economic indicators suggest that consumers may be becoming more selective in their spending after 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