In the final quarter of 2022, consumer spending increased at a rate of 3.3%, accounting for two-thirds of GDP. The growth was driven by higher spending on health care and financial services, although spending on goods was revised lower. Meanwhile, nonresidential investment figures strengthened, with upward revisions to spending on structures, intellectual property, and equipment.
Excluding food and energy, the personal consumption expenditures price index increased by 2% in the fourth quarter, which is the lowest since 2020. This was slightly less than the previous estimate. The Federal Reserve’s preferred inflation metric also showed that adjusted pre-tax corporate profits saw a 4.1% increase, which is the largest since mid-2022. After-tax profits as a share of gross value added for non-financial corporations remained high at 15.1%.
Recent earnings reports have shown that publicly-traded companies are experiencing higher gross margins due to relief on input costs, though this isn’t necessarily translating to lower prices for consumers. This trend has contributed to investor optimism as the S&P 500 is on track for its fifth consecutive month of gains. President Joe Biden has highlighted strong corporate earnings as a sign of companies profiting off of consumers with high prices, especially in grocery stores.
Recent economic indicators suggest that consumers may be becoming more selective in their spending following years of pent-up demand-driven consumption. Data on personal consumption expenditures for February are expected to be released on Friday. The trajectory of inflation and the labor market will play a crucial role in determining how long consumers can continue to support economic growth. Another report showed that continuing applications for US unemployment benefits rose to 1.82 million in the week ending March 16, which is the highest level in nearly two months.
