Consumption Pauses, Incomes and Inflation Up in January

Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

The Bureau of Economic Analysis released data on four major indicators today: a revision of its 4Q25 GDP estimate and January data on consumer spending, personal income and Personal Consumption Expenditures (PCE) inflation. We’ll cover all four of these releases here, with an emphasis on the implications for consumer spending. At the end of this post, we will also provide an update on how government data releases stand in the wake of shutdown-induced disruptions.

4Q25 GDP growth was revised down from an already disappointing 1.4% to only 0.7% growth. This markdown was due to significantly lower prints for health care consumption, foreign trade in services and housing construction. We covered housing market conditions data in our February 27 post, and we’ll discuss health care consumption here. All in all, we stick with our conclusion of a month ago (February 20 post) that the real drags on growth in 4Q25 were a sharp drop in motor vehicle output and sharply reduced government spending due to the shutdown. Together, these two items reduced 4Q25 growth by 2.5 percentage points. Both of these drags should revert to or near 3Q25 output levels in 1Q26, which would provide a very large boost to 1Q26 GDP growth.

Beneath this quarterly “chop,” it is the case that consumer spending growth slowed a bit in December and January. The aforementioned large downward revision to consumption of health care services reduced the 4Q25 growth rate for this aggregate, but spending there then rebounded in January, based on today’s data. Other components of consumer spending are summarized in Exhibit 1.

As you can see, services spending growth has proceeded quite steadily outside of health care and, again, health care spending itself is growing nicely, though not quite as rapidly as previous data suggested. Rather, the slowing in consumer spending in December and January was actually due to lower spending on merchandise. There were substantial declines in consumer purchases of home electronics, apparel and cosmetics/pharmaceuticals.

(The blue line in Exhibit 1 excludes motor vehicles, but motor vehicle spending declined only mildly in December/January. If you are wondering, the sharp drop in vehicle production in 4Q25 was mostly due to inventory cutbacks and a decline in business purchases of trucks. These are rebounding in 1Q26.)

Maybe the goods spending declines reflect a soft Christmas season, or maybe they reflect delayed effects of tariffs. We doubt they will persist, as household income growth continues at a decent pace. Despite the paucity of job growth, real growth in private-sector wages and salaries is proceeding at a 2% annual rate. Unlike other analysts, we don’t expect a coming spending boost from 2026 tax cuts, but we do think steady real income growth will lead to steady growth in spending on both goods and services, making the December/January softness a pause rather than a downturn.

In fact, retail sales growth held up reasonably well in the months through January. The flat-to-down real spending on goods in December/January mostly reflects higher goods prices in those months. Exhibit 2 shows the core Consumer Price Index (CPI) and PCE data as currently available, the CPI through February and PCE through January. Much of the upturn in December/January inflation does indeed reflect goods prices, coming off possibly (shutdown-induced?) understated inflation in October/November.

This is not a good thing, and we’ll see whether consumer resistance tempers retailers’ pricing. (Again, higher prices in December/January look to have eaten into real purchases.) Our point is that underlying demand for goods remains reasonably steady and, again, services spending is growing nicely. So while the spending decline is a concern, there are no indications of a weakening in consumer demand.

Most of the economic data we analyze are produced by four government agencies:

The Bureau of Economic Analysis (BEA) within the Commerce Department (GDP, consumption, PCE)
The Census Bureau, also within Commerce (retail sales, construction, factory orders)
The Bureau of Labor Statistics (BLS), within the Labor Department (jobs, CPI), and
The Federal Reserve (Fed) (industrial production)

These agencies were affected to various degrees by the government shutdown. BLS and the Fed are now fully caught up with their pre-shutdown release schedules. With today’s releases, BEA is two weeks behind schedule and plans to return to its normal schedule by the end of April. Census is a month behind schedule and has not yet released a timetable for getting back on schedule.

As Census catches up further on its releases, various indicators will be published at odd (unscheduled) dates. We’ll cover these “surprise” releases as best we can while attempting to follow a normal schedule for our posts on the other indicators.

© Western Asset Management Company, LLC 2026. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").

Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.

For the Franklin Templeton global-non product disclosures, please click here.

These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.

Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.

Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.

Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.

These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.

Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Ltda. is regulated by Comissão de Valores Mobiliários; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.