Year-over-year, consumer spending jumped by 5.6% and retail sales by 4.8% in January. So there’s that.

By Wolf Richter for WOLF STREET.

The financial media was thrown into a tizzy this morning when the Bureau of Economic Analysis released its Personal Consumption Expenditures report, which said that the seasonally adjusted annual rate of consumer spending dropped by 0.2% or by $30.7 billion, in January from December, driven by a $77-billion plunge in spending on goods, including a $69-billion plunge in spending on durable goods, which included a $41-billion plunge in spending on motor vehicles and parts.

Upon which the Atlanta Fed’s GDPNow – which takes in the data as it’s released to adjust its forecast of the BEA’s first estimate of Q1 GDP – experienced a crypto-style rug-pull from +2.3% two days ago, in a straight line to heck, to -1.5% today, which went viral:

This 0.2% decline in January came after the massive upwardly revised 0.8% jump in December, the biggest jump in two years. Actual consumer spending trends don’t turn around on a dime like this.

A similar plunge of seasonally adjusted retail sales in January had already thrown the media into a tizzy on February 14, upon which we took A Romp through the Massive Seasonal Adjustments this Time of the Year.

Januarys always suck when it comes to spending on goods. The question is: Did it suck more or less than prior Januarys?

December is by far the best month of the year for spending on goods due to the holiday binge. Then in January, spending on goods, as per retail sales, plunges by 15% to 22% from December (range of the past 20 years).

This January, retail sales plunged by 16.5% from December. There were only two Januarys with smaller plunges: in 2023 (-14.8%) and in 2021 (-15.4%). The rest of the Januarys experienced bigger plunges.

Huge seasonal adjustments try to iron out the differences between December and January, by reducing December’s spending figures and increasing January’s spending figures. And since these adjustment factors are so huge, if they’re even slightly off and the error gets multiplied when it’s translated into an annual rate, the month-to-month change of that annual rate would be off by enough (see today’s -0.2%) to send the financial media into a tizzy.

January and February consumer spending data and retail sales data are always squirrely because a big part of what we’re looking at are just seasonal adjustments.

Retail sales are also released as actual retail sales, not seasonally adjusted, and not annual rate, and they looked OK in January, down by less month-to-month than in most Januarys, and up by 4.8% year-over-year.

The BEA’s consumer spending data isn’t available (as far as I know) on a not-seasonally-adjusted and not-annual-rate basis, unlike retail sales. It’s only available as seasonally adjusted annual rates (SAAR).

Large year-over-year increases in January indicate that something is askew in these seasonally adjusted month-to-month changes in January:

• Retail sales, not seasonally adjusted: +4.8% yoy.
• Consumer spending, Total, SAAR: +5.6% yoy
• Consumer spending, Durable Goods, SAAR: +4.0% yoy.
• Inflation-adjusted consumer spending, Total, SAAR: +2.1% yoy.
• Inflation-adjusted consumer spending Durable Goods, SAAR: +5.3% yoy (deflation in durable goods increases inflation-adjusted spending on them)

Spending on motor vehicles and parts, according to today’s consumer spending data, plunged by a seasonally adjusted annual rate of $41 billion. But…

Best January for actual sales of new vehicles since 2020. The BEA reported that actual new-vehicle deliveries in January to end-users, such as consumers and fleets, rose year-over-year to 1.11 million new vehicles, the least bad January since January 2020, by a hair less bad than January 2022. Januarys always suck. But this January sucked a little less than the prior four Januarys?

Best January for actual sales of used vehicles since at least 2021. Used-vehicle retail sales by franchised and independent dealers in January rose 8% year-over-year to 1.41 million units, beating the Januarys of 2024, 2023, and 2022, which is as far back as the monthly data from Cox Automotive goes (the plunge in June 2024 was caused by the hack of CDK’s cloud-based dealership software in mid-June).

Over time, seasonal adjustment zero each other out. Seasonal adjustment factors subtract from the months that are seasonally strong and add to the months that are seasonally weak, but over the period of a year, they cancel each other out, and thereby any errors cancel each other out. What seasonal adjustments do essentially is shift activity around within the year.

This is why year-over-year comparisons can provide additional information, especially in December through February consumer spending and retail sales when huge seasonal adjustments become a big part of the month-to-month changes.

To me it looks like seasonal adjustments gone-awry were at least in part responsible for the huge 0.8% jump in December’s seasonally adjusted annual rate and January’s 0.2% dip, likely overstating December’s spending and understating January spending.

The three-month average increase in January was 0.4%, and that sounds about right. The year-over-year increase of 5.6% was in line with the big year-over-year increases in prior months.

Other influences might have happened as well. The weather is always wintery in January, and so seasonal adjustments try to make up for that. But maybe the winter weather had a bigger impact than normally in January. The fires in Los Angeles may have turned either way: Lots of people had to buy all sorts of stuff after they fled their homes, but the nightmare might have kept other some people in the area from buying stuff they would have bought otherwise.

The BEA also reported a huge 0.9% jump in personal income in January from December, the biggest jump since July 2022, based on the seasonally adjusted annual rate, and here it seems to me that seasonal adjustments whacked it the other way, understating December’s income and overstating January’s income.

Consumer spending trends don’t turn around on a dime like this. So for now, I think consumers overall keep doing what they’ve been doing: making money and spending money at a solid clip.

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