- by New Deal democrat
Before I get to the main event, a couple of quick comments on the other data released so far this morning:
1. Real GDP as revised only grew at 0.7% annualized in the 4th Quarter of last year. This is often, but by no means always, recessionary. And since there was a government shutdown for over a month of that quarter, there will be something of a rebound this quarter.
2. Durable goods orders are very noisy month to month. The unchanged readings for January in both headline and capital goods orders are obviously not good, but they follow an almost unbroken chain of increases dating back to late 2024, and especially the 2nd half of last year. So, one punk month, could mean something, could be just noise.
Now on to the most important data release….
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 January, so it is still several weeks later than usual. In January, nominally both personal income and spending rose 0.4%. But the PCE deflator increased 0.3%, both only increased 0.1% in real terms. 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 1.5% YoY, the lowest in three years; while real spending improved to 2.4%. But the trend in both measures remains deceleration.
Once we exclude government transfers — one of the important coincident metrics used by the NBER to date recessions, real personal income rose 0.2%:
On a YoY basis, this was up 0.6%. This was an improvement from last month’s initial look of 0.1% YoY, which has now been revised higher. Nevertheless, with only three exceptions — 2022 and 2013 (which was an artifact of a change in Social Security withholding), and one month in 1995 — such a low rate has only happened during recessions:
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, with the war with Iran that is not going to happen now. While the 0.3% increase in PCE prices for the month cause the YoY change to decline -0.1% to 2.8%, the increasing trend remains intact:
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. In January, while real spending on services rose 0.3%, real spending on goods declined -0.4%, and on durable goods declined -1.1%. The below graph shows the post-pandemic record, normed to 100 as of one year ago:
The trend in goods spending was flat all last year. To smooth out some of the noise, I have been tracking the three month average. That average was almost completely flat in the period from July through December, and made a six month low in January.
The updating of the PCE deflator also allows for an update to another important coincident indicator used by the NBER to consider whether the economy is in recession or not; namely, real manufacturing and trade sales, which is delayed by one additional month. These increased 0.8% in December, and were up 1.3% for all of 2025:
The three month average also increased, but keep in mind this has been a very volatile metric.
Finally, one double-edged sword is that the personal saving rate - i.e., the portion of income left over after spending - increased sharply, from 4.0% to 4.5% in January:
On the one hand, this is good because it means that consumers are in somewhat less precarious position, after saving less in late 2025 than at any time since the turn of the Millennium except for the several years before the Great Recession and 2022. But on the other hand, a sharp retrenching by consumers is also something that typically happens just before the start of a recession.
To sum up, as of January real personal income was just barely improving, while real spending on goods, and in particular durable goods, have not just flatlined, but have declined. It is not likely that real sales of goods will continue to increase in such a scenario. Meanwhile, consumers increased their saving.
Last month I concluded by writing that “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.” The leading portions of the report did turn down - and yesterday the stock market made a new three month low.
Batten down the hatches.
