Consumer Spending Fell in December

The drop in consumer spending in December marked the first month-over-month decline since last winter, and signal that rising inflation, supply-chain volatility and the Omicron variant of Covid-19 all tempered consumer outlays in a key month of the holiday season. Consumers, spurred by falling unemployment and government stimulus, had largely continued to spend since a brief recession ended in the spring of 2020.

“December is pretty terrible in terms of spending,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez, Inc., citing the combination of Omicron, supply shortages and inflation eating into purchasing power. “It’s going to be a tough slog to get consumers to do much of anything” in January either, he said, given that Omicron infections surged across the country this month.

The easing of consumer spending comes despite strength in other areas of the economy. The unemployment rate was a low 3.9% in December and workers’ wages grew, while U.S. gross domestic product increased at a strong 6.9% annual rate in the final quarter of 2021, as consumers front-loaded holiday spending and businesses restocked shelves after months of pandemic-related disruptions. Friday’s report showed households’ incomes rose 0.3% in December, while inflation rose more quickly.

Omicron is also keeping some sick workers at home, disrupting business operations at factories, airlines and restaurants.

There are broad signs that consumers pulled back in January. Spending at restaurants, airlines and on travel bookings has cooled since late November, according to card transaction data from research firm Facteus, and it has been in decline this month at home-supply stores and wholesale clubs.

Economists largely forecast growth will be weak in the first quarter of this year, but they predict consumer spending will rebound once the current Omicron wave of Covid-19 infections tapers off.

Still, strong growth and low joblessness are helping to drive inflation, and higher prices threaten to squeeze consumers and businesses in the months ahead, along with expected higher interest rates from the Federal Reserve.

Sydney Zimmermann, of Erie, Pa., is feeling the pinch from higher grocery costs, particularly for items such as fresh produce.

“It’s disheartening to think that strawberries, avocado and bananas are increasing in price,” she said, adding that she thinks healthy eating is especially important in a pandemic.

The 29-year-old has also noticed that prices have risen at local restaurants, and eateries that used to be closed only on Sundays now tend to be closed on Mondays and Tuesdays as well because of worker shortages, “so you have less options.”

One bright spot for consumers is that supply-chain bottlenecks and product shortages caused by a rebound in demand after Covid-related shutdowns appear to be easing. In the fourth quarter, inventory investment made up the lion’s share of GDP growth, as businesses replenished shelves and supplies.

Kohli Flick, owner of home goods store Becket Hitch in Lutherville, Md., a suburb of Baltimore, said supply-chain issues in the broader economy actually benefited her business this holiday season, as online shipping delays and out-of-stock notices sent shoppers to her bricks-and-mortar store for gifts.

Ms. Flick said she is optimistic. “I feel like it’s going to be a good year,” she said. “I think we’re kind of at a point where obviously the world as we knew it pre-2020 isn’t returning any time soon. We have to figure out how to live in the new normal.”

Write to Harriet Torry at [email protected]