Consumer spending falls off a cliff in December, posts biggest drop since 2009

The numbers: Amid the biggest stock-market plunge in decades, Americans reduced spending in December by the largest amount since the economy exited recession in 2009.

Consumer spending sank 0.5% in December, the government said Friday. The decline was a touch higher than the MarketWatch forecast.

Spending fell even though personal incomes soared by 1%, marking the biggest increase since 2012.

Income growth was padded by a few unusual factors unlikely to be repeated soon, though. Income growth fell 0.1% in January.

The latest report, long delayed by the partial government shutdown, includes income figures for both January and December but just the spending figures for December.

The best news in the report: Inflationary pressures were muted again.

The 12-month rate of inflation slowed to 1.7% in December from 1.8%, as measured by Federal Reserve’s preferred PCE gauge. The core rate that excludes food and energy was flat at 1.9%.

The PCE index rose 0.1% on the month. The core rate increased 0.2%.

Read: The rise of the robots and decline of inflation: How AI is keeping prices low

What happened: Consumers spent less on new cars and trucks, likely because of discounts and other specials. And they also spent less on electricity and gas. So the decline in spending wasn’t entirely bad.

The December report also contains some quirks that raise questions about how accurately it reflects the economy at year end. Other reports such as fourth-quarter GDP suggest U.S. growth didn’t slow quite as dramatically as the spending figures suggest.

Some of the quirks: The savings rate soared to 7.6% from 6.1%, an atypically large increase. And incomes were lifted by a big increase in farm subsidies and a special $11 billion onetime dividend by software developer VMware VMW, -2.39% 

Also Read: Consumer confidence rebounds after Wall Street rally, end of shutdown

Big picture: The U.S. economy clearly slowed toward the end of 2018, but unlike consumer spending in December, it did not fall off a cliff.

What’s more, the early evidence in 2019 points to stable if slower growth as the economy closes in on setting a record for longest expansion ever.

The stock market has recovered almost all its losses from December, for one thing, and consumer confidence has rebounded as well. The Federal Reserve also announced it would stop raising interest rates for the time being. Rising prospects for trade deal with China is budding tailwind, too.

Market reaction:The Dow Jones Industrial AverageDJIA, -0.27%and S&P 500SPX, -0.28% were set to open sharply higher in Friday trades. The 10-year Treasury yieldTMUBMUSD10Y, +0.80% rose a few basis points to 2.74%.

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