In the fourth quarter, consumer spending increased at a rate of 3.3%, driven by stronger spending on healthcare and financial services. Goods outlays, however, were revised lower. Nonresidential investment also saw an increase, reflecting upward revisions in spending on structures, intellectual property, and equipment. Adjusted pre-tax corporate profits rose by 4.1%, the highest since mid-2022, while after-tax profits for non-financial corporations remained at a historically elevated level of 15.1% of gross value added.
The Federal Reserve’s preferred inflation measure, the personal consumption expenditures price index, rose by 1.8% annually in the fourth quarter, the lowest since 2020. Excluding food and energy, the index rose by 2%, slightly lower than the previous estimate. Recent earnings reports from publicly-traded companies have shown an increase in gross margins as input costs are finally easing, though this may not necessarily translate to lower prices for consumers. This has contributed to investor optimism as the S&P 500 heads for a fifth consecutive month of gains.
President Joe Biden has highlighted robust earnings as a sign that companies may be taking advantage of consumers with high prices, particularly in grocery stores. More recent economic data suggests that consumers may be becoming more selective in their spending habits after years of demand-driven expenditure. Data on personal consumption expenditures for February is expected to be released on Friday.
Going forward, the trajectory of inflation and the labor market will be crucial in determining how long consumers can continue to support economic growth. A separate report indicating an increase in continuing applications for US unemployment benefits in the week ending March 16, the highest level in nearly two months, also suggests potential challenges in the labor market.