Consumer Spending on Services Blows Past Inflation, Fuels Services Inflation Further

Consumer spending on services jumped by 0.7% in November from October, seasonally adjusted, and by 8.9% from a year ago, according to the Bureau of Economic Analysis today. Services accounted for 62.1% of total consumer spending: insurance, healthcare, housing, travel bookings, entertainment, repairs, cleaning services, haircuts, etc.

Adjusted for inflation, so “real” consumer spending on services rose by 0.3% in November from October, and by 3.5% year-over-year. The last time before the pandemic when real spending on services grew at that year-over-year rate was in July 2015. Demand for services has been relentlessly strong, despite inflation and despite the Fed’s efforts to tighten and thereby lower demand.

Spending on services has easily outrun inflation that continues to rage in services, and so this demand for services continues to provide further fuel for inflation in services:

But “real” spending on goods fizzled

Spending on durable goods, not adjusted for inflation, plunged by 3.3% in November from October. Durable goods are new and used vehicles, appliances, electronics, furniture, etc.

Adjusted for inflation, “real” spending on durable goods fell less, -1.5% in November from October, due to the steepest drop in durable goods prices in years.

Compared to a year ago, real spending on durable goods was nearly flat (+0.6%). Note the historic stimulus-fueled spike in demand that is now getting worked off. Compared to November 2019, “real” spending on durable goods was still up by 25%!

Spending on non-durable goods, adjusted for inflation, dipped by 0.1% in November from October, and was down 1.5% from a year ago. Nondurable goods are dominated by food, fuel, and household supplies. And it’s still up by 10% from November 2019:

Overall “real” spending growth: slowing

Overall consumer spending on goods and services, not adjusted for inflation, ticked up 0.1% for the month, but was still up by 7.7% year-over-year.

“Real” consumer spending on goods and services, adjusted for inflation, was unchanged for the month and up by only 2.0% year-over-year.

In the years before the pandemic going back to 2015, real growth of consumer spending of 2% year-over-year occurred only in one month. The rest of the months, spending was far higher. To get to the months with 2% growth and below, we have to go back to 2014.

So the Fed’s tightening has had an impact on consumer spending, and inflation has had an impact as the mood has soured. But recently, it helped that gasoline prices have re-plunged. Nothing turns Americans off more than getting gouged at the pump.

But the slowdown in demand has hit goods, where inflation is already backing off, while growth in spending on services remains robust, and this is of course where inflation is now solidly entrenched.

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