(Bloomberg) – The U.S. took a break in November, a month following a surge in holiday spending. However, this pause could be more severe if Americans start to pull back in the face of both the fastest inflation rates in decades and the micron variant.

After adjusting for increased prices, purchases of goods and service were unchanged after an October solid 0.7% increase. The government’s figures were the marquee of a pre-holiday burst of economic reports Thursday that showed stronger orders for durable goods, increased new-home sales and firmer consumer sentiment. 

There are several crosscurrents that underlie the spending numbers. The strong increase in holiday spending this month is due to headlines about supply issues.

However, consumers face the most rapid inflation in years. Consumers have less discretionary money because every trip to gas pumps and grocery stores takes away more of their pay. Covid-19’s new variant omicron may impede the expected rebound in service outlays.

The increase in price means that Americans spend more on their essentials. The amount of money that was spent on housing and utilities grew last month. So did the outlays for gasoline and food. Inflation-adjusted services spending increased 0.5% last month, which was the highest in three months. However, goods expenditures fell 0.8% for the first time since July.

Personal consumption expenditures price index, used by the Federal Reserve to target 2% inflation, rose 0.6% from one month ago and 5.7% in November 2020. This is the highest reading since 1982. 

This data comes on the heels a Fed official’s recent hawkish shift. Fed officials have been under intense pressure to address overheating markets. According to new projections, policy makers are planning on raising borrowing costs by three-quarters next year.

Despite rapid price rises, consumers are not saving as much. After-tax income or disposable income fell by 0.2% after being adjusted for inflation. This is the fourth consecutive decline. Personal saving, or the percentage of disposable income that is saved by individuals — fell to 6.9% — its lowest level since December 2017.

The Bloomberg Economists’ Viewpoint…

“A flat reading on real consumer spending in November — even before omicron hit — suggests inflation may be starting to weigh on consumer resilience into year-end… The increase in services was widespread, a positive sign of rotation out of goods spending going into next year.”

Yelena Shulyatyeva, Anna Wong are economists

Even though federal stimulus is decreasing, many companies are increasing their pay to retain and attract talent in a time of widespread job loss. The report revealed that wages and salaries increased 0.5% in November after a 0.8% increase in October.

The Core Price Index, which does not include food or energy, increased 0.5% in the preceding month and 4.7% in the past year, making it the fastest increase since 1983.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said he’s scaling back his forecast for the gain in fourth-quarter consumer spending on the grounds that “the omicron Covid wave appears to be hitting spending at restaurants.” The firm now sees outlays rising at a 5.5% annualized rate in the period, down from the prior 6% forecast, according to a note Thursday.

The outlook for residential and manufacturing construction remains positive after Thursday’s reports revealed that durable goods bookings were stronger and new home sales are at their fastest pace in seven months.

The 2.5% increase in orders for goods that will last many years was due to more bookings of commercial aircraft, motor cars, and metals, as well as increased demand for communications equipment. Although core capital goods orders have declined, these figures still follow the steady rises in previous months which show a strong pattern of investment. 

Also, housing demand is increasing and builders are still experiencing backlogs. Although the annualized increase in single-family house purchases was 12.4%, it reached 744,000 annually. The prior figure had been sharply reduced.

Construction on 221 000 homes were not yet started in the month of May. This suggests that backlogs are increasing. 

According to separate data, the University of Michigan found that consumers felt more positive about this month’s economy and their outlook on finances.

The Labor Department reported that new state unemployment benefits applications totalled 205,000 for the week ending Dec. 18. This is unchanged from previous periods and underscores the low level of job loss.

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