US consumer spending slows to 0.3% gain in December

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In this Thursday, Jan. 9, 2020 photo a pair of sunglasses sits in a storefront window in the Harvard Square neighborhood, of Cambridge, Mass. On Friday, Jan. 31, the Commerce Department issues its December report on consumer spending, which accounts for roughly 70 percent of U.S. economic activity. (AP Photo/Steven Senne)

WASHINGTON, D.C. – U.S. consumer spending slowed in December as Americans spent more on prescription drugs and health care services but those gains did not offset a sharp slowdown in spending on new cars.

The Commerce Department said Friday that consumer spending rose a moderate 0.3% after a stronger 0.4% gain in November. Income growth also slowed in December, rising by 0.2%, just half the 0.4% increase in November.

Inflation as measured by a price gauge preferred by the Federal Reserve was up 0.3% in December compared to a 0.1% November increase.

However, for the full year, prices rose just 1.6%, well below the Fed’s 2% target. The modest inflation readings gave the Fed the leeway last year to cut its benchmark interest rate three times to protect the economy from a global slowdown and manufacturing disruptions caused by the U.S.-China trade war.

Consumer spending is closely watched because it accounts for 70% of economic activity. The economy, as measured by the gross domestic product, grew at a 2.1% annual rate in the fourth quarter, matching the GDP performance in the third quarter. Consumer spending increase at a 1.8% rate after six months of much bigger gains.

Despite the fourth quarter slowdown, economists believe consumer spending will remain a fundamental driver of the U.S. economy, boosted by a strong labor market which has pushed unemployment to a 50-year low and boosted incomes.

For the year, the GDP grew by 2.3%, a sharp drop from 2.9% GDP growth in 2018, which had been the fastest pace since a similar gain in 2015.

Economists look for more slowing this year as the boost from the 2017 tax cuts fade further but they do not expect a recession this year, in large part because a ceasefire in the U.S.-China trade conflict has improved the outlook for business investment.

For December, spending on durable goods such as cars fell by 0.8% while spending on nondurable goods such as food rose by 0.9%. Much of that increase reflected a big jump in spending on prescription drugs.

Services were up 0.3% with a big factor in that increase a rise in spending on health services.

The various changes left the personal saving rate at 8% of after-tax income in December, up from 7.7% in November.