Our Drunken Sailors Started the Holiday Binge, Fueled by Disposable Income that Outran Inflation by a Wide Margin

Consumers got a break on prices of durable goods, and so they tripled down?

By Wolf Richter for WOLF STREET.

It’s not a surprise that our Drunken Sailors, as we’ve lovingly and facetiously called them all year, keep splurging on goods and services, despite endless expectations that they would run into whatever wall of the day. A record number are working, and they have gotten big pay raises, and they’re making record amounts of money, and retirees have received an 8.7% Social Security cost-of-living-adjustment for 2023, and yield investors have been receiving around 5% or more on their trillions of dollars in money market funds, CDs, high-yield savings accounts, and T-bills, and mom-and-pop landlords have pocketed nice rent increases this year, and it all adds up.

Per-capita disposable income, adjusted for inflation, jumped by 0.4% in November from October, the biggest increase since March 2023, and beyond that since peak-stimulus-March 2021, according to the Bureau of Economic Analysis today.

Year-over-year, per-capita disposable income, adjusted for inflation, jumped by 4.3%. That’s a huge relief, after having fallen woefully behind inflation in 2022. In other words, per-capita disposable income has been outrunning inflation by 3 to 5 percentage points all year. This is where the money came from to do all this spending:

Disposable income is income from all sources minus income taxes and social insurance payments. It includes income from wages and salaries, transfer payments from the government (mostly Social Security benefits), income from interest, dividends, rentals, farms, personal businesses, etc. But it excludes capital gains. This is what consumers had left to spend on goods and services and to save. And they spent a lot and saved some too.

The personal saving rate rose to 4.1% (from 3.8% in October) – somewhat lower than in the years after the Financial Crisis, but higher than in the years before the Financial Crisis. That’s the portion of disposable income that consumers didn’t spend but put aside in various ways, such as contributions to retirement accounts, paying down credit cards, or leaving a little extra in their checking accounts.

Personal income without transfer payments, adjusted for inflation, jumped by 0.6% in November from October, and was up by 2.9% year-over-year.

This is income from wages, interest, dividends, rental properties, farm income, small-business income, etc., but without Social Security benefits, unemployment insurance, VA benefits, etc.

This income growth is a function of record employment, rising wages, higher interest incomes and rental incomes, etc. It means our drunken sailors have out-earned inflation by a fairly wide margin in November – not including government transfer payments – and that’s where this spending growth comes from.

You can see the period in 2022, when inflation-adjusted income fell as inflation outran income growth.

And they went partying.

Consumer spending, adjusted for inflation, rose by 0.2% in November from October, as consumers were outspending inflation at a good clip.

Year-over-year, adjusted for inflation, spending rose by 2.7%, the most since March 2022.

The three-month moving average, which irons out the monthly squiggles and shows the trends better, rose by 0.3% for the month and by 2.3% year-over-year, the most since April 2022. The chart shows the three-month moving average. Note the slowdowns – the flat spots – late last year and in the spring this year.

Spending on services, adjusted for inflation, rose by 0.2% for the month and by 2.2% year-over-year.

Services is of course where inflation is now entrenched. Services PCE inflation, also released today, rose by 4.1% year-over-year, on inflation in rents, accelerating to 6.2% annualized, and consumer spending outran that 4.3% services inflation by 2.2 percentage points!

Spending on services accounts for 65% of total consumer spending. It includes housing costs, utilities, insurance, streaming, broadband, cellphone services, entertainment, healthcare, airfares, lodging, rental cars, memberships, etc.  The remaining 35% are spread among durable goods (cars, computers, furniture, appliances, etc.) and non-durable goods (food, gasoline, clothing, shoes, supplies, etc.).

The three-month moving average of spending on services, adjusted for inflation, rose 0.2% for the month and 2.1% year-over-year.

Spending on durable goods, adjusted for inflation, jumped by 0.9% for the month, by 6.7% year-over-year.

Durable goods prices have been dropping for a year – meaning negative inflation. In November, the PCE price index for durable goods, released today, fell by 0.4% for the month and by 2.1% year-over-year.

Not adjusted for inflation, spending on durable goods jumped by 0.5% for the month, and by 4.5% from a year ago. Consumers got a break on prices of durable goods, and so they tripled down?

The three-month moving average rose by 0.5% for the month and by 5.0% year-over-year.

It’s just mind-boggling, this continued spending on durable goods well above pre-pandemic trend, even after the huge spike during the pandemic. Homes, garages, storage lockers, and toolsheds full to the ceiling, no problem. On an inflation adjusted basis, spending is now almost where it had been during the very peak of the stimulus craze:

Spending on nondurable goods, adjusted for inflation, rose by 0.3% in November from October, and by 2.0% year-over-year.

The three-month moving average rose by 0.2% for the month and by 1.4% year-over-year. There had been a mild decline in spending after the huge pandemic spike, but it never reverted to pre-pandemic trend, and then started growing again in the second half of this year roughly in parallel to pre-pandemic trend, but well above it, and looks to be pulling gently away from it. These are just astounding charts:

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