A new PCE report shows the U.S. economy leaving the average household worse off despite its overall resilience thanks to affluent earners.
By Yulia Almazova
Americans earned more in December, but not nearly enough to offset rising inflation, undermining hopes raised by a recent CPI report that suggested prices were easing.
Disposable income fell by one percentage point, according to the personal income report released Friday by the Bureau of Economic Analysis. The Personal Consumer Expenditure rose to 3.0%, a full percentage point over the Federal reserve’s target of 2.0%. Consumer spending growth nearly halved, falling from 0.7% to 0.4%. To add salt to the injury, the consumer savings rate dropped two percentage points to 3.6% – a much weaker December than had been anticipated.
Despite the U.S. economy showing aggregate growth of 2.2% last year, Friday’s PCE report comes as a reality check – people are paying more for less due to growing inflation. The duality of a thriving macro economy and strained individual finances exposes a K-shaped economy trend, where aggregate growth conceals a widening gap between winners and losers.
“I think it is a sign of a socio-economic divide where upper-income households are enjoying significant appreciation in their assets and are continuing to spend versus lower-income households that are struggling to keep up,” said Tom Simons, senior economist at Jefferies.
While the headline numbers look solid, the reality is grimmer for the average US consumer. December’s personal savings rate sits below the 20-year historical average – a sign of a thinning financial buffer for most American households.
“To continue strong consumer spending, you would like the savings rate to stabilize,” said Mathew Luzzetti, chief US economist at Deutsche Bank Securities Inc. “But we don’t think recession risks are particularly elevated at the moment.”
The AI investment boom’s positive effect on the stock market has fueled the wealth and confidence of asset-heavy Americans, concentrating most of net profit at the top, and simultaneously disguising the uneven distribution of wealth in combined numbers.
Private wages and salaries increased $19.0 billion, reflecting an increase of $20.2 billion in services‑producing industries. The caveat is that the data offers no breakdown between high-paying service sectors like tech and finance and lower-wage ones like retail and hospitality. The true distribution of those gains remains a question amongst economists.
“Wealthier households are really what support the aggregate numbers,” said Simons.