- by New Deal democrat
Personal income and spending are among the most important monthly indicators of all, because they give us a detailed look at consumption by the broad range of American households. And since consumption leads employment, they also give us an idea of what is likely to happen with regard to jobs in the near future.
This morning’s data was for December, so it is almost one month stale. For the month, nominally personal income rose 0.3% and spending rose 0.4%. But the PCE deflator also increased 0.4%, so in real terms income rounded to unchanged, and spending rounded to only a 0.1% increase. Here is what they look like since the pandemic:
Note that real personal income has been flattening for months, and has been lagging spending, which becomes even more apparent on a YoY basis:
Real personal income is only up 1.4% YoY, and real spending is up 1.7%. And both measures are decelerating.
Further, once we exclude government transfers — one of the important coincident metrics used by the NBER to date recessions, real personal income actually declined -0.1%:
Real personal income excluding transfers was only up 0.1% YoY, and completely flat since last January. With only two exceptions — 2022 and 2013 (which was an artifact of a change in Social Security withholding) — such a low rate has only happened during recessions:
How is that spending being sustained? Households are digging into their savings. The personal savings rate declined -0.1% to 3.6%, the lowest rate since 2022. In fact, as the below long term historical graph, which subtracts -3.6% so that the current rate shows at 0, the personal saving rate has only been this low during the years immediately preceding the Great Recession, and during 2022:
In 2022, the economy was saved by the hurricane strength tailwind of deflating producer prices, which enabled a continued Boom in consumer spending. Needless to say that is unlikely to happen now. To the contrary, as indicated above, PCE prices increased 0.4% for the month, are were up 2.9% YoY, the highest rate of YoY increase since March 2024:
An accelerating PCE deflator is not something that is going to encourage the Fed to cut interest rates further.
And the leading portions of consumer spending are also flashing red warning signals. Historically, the pattern has been that real spending on goods (red in the graph below) turns down in advance of recessions, and in particular spending on durable goods (orange), which tends to turn down first. Real spending on services (blue) has tended to rise even during all but the most prolonged or deep recessions. The below graph shows the post-pandemic record, normed to 100 as of one year ago:
In December, services spending rose 0.3%, but real spending on goods declined -0.5%, and on durable goods -0.9%. For all of 2025, services spending did indeed increase, up 2.6%, but real spending on goods declined -0.1%, on real spending on durable goods declined -2.9%. And it wasn’t just one poor month. The trend in goods spending has been flat all year. To smooth out some of the noise, I have been tracking the three month average. That average peaked in October, and made a six month low in December.
In summary, real personal income, as well as real personal spending on goods, have flatlined in recent months, and are now slightly negative. Savings are being used to power additional spending, making consumers particularly vulnerable to any adverse shock. Any further deterioration would be clearly recessionary — and a downturn in the stock market, which has delivered so much “wealth effect” spending, could be just such a blow.
