- Part of decline was after 2.6 percent surge in December as businesses rushed to pay dividends and bonuses before the new year
- Consumer spending rose 0.2 percent linked to utilities but decline in goods
- Savings were the smallest since December of 2007
- Economists expect a significant decrease in real consumer spending in first half of year
PUBLISHED: 11:34 EST, 1 March 2013 | UPDATED: 13:07 EST, 1 March 2013
U.S. incomes tumbled by 3.6 percent in January marking its biggest drop in the last 20 years while consumer spending rose behind an increase in utility spending linked to a recent cold spell.
In the Commerce Department’s report on Friday consumer spending increased 0.2 percent after a revised 0.1 percent rise the prior month. Spending had previously been estimated to have increased 0.2 percent in December.
Consumer spending accounts for about 70 percent of U.S. economic activity and when adjusted for inflation, it gained 0.1 percent after a similar increase in December.
Spending: Behind January’s reported increase in consumer spending are reasons of a cold snap that raised utility spending, the streets of central Columbia, Missouri seen, though a decline in goods
January’s increase was in line with economists’ expectations.
Though spending rose in January, it was supported by a rise in services, probably related to utilities consumption after a cold snap during the month.
Spending on goods fell, however, suggesting some hard hit from the expiration at the end of 2012 of a 2 percent payroll tax cut.
Tax rates for wealthy Americans also increased.
Part of the income decline was payback for a 2.6 percent surge in December as businesses, anxious about those higher taxes, rushed to pay dividends and bonuses before the new year.
Income cut: Spending on goods fell suggesting some hit from the expiration at the end of 2012 of a 2 percent payroll tax cut
With income dropping sharply and spending rising, the saving rate – the percentage of disposable income households are socking away – fell to 2.4 percent, the lowest level since November 2007. The rate had jumped to 6.4 percent in December.
Savings were also the smallest since December of 2007.
The impact is expected to be larger in February’s spending data and possibly extend through the first half of the year as households adjust to smaller paychecks, which are also being strained by rising gasoline prices.
‘We expect a significant decrease in real consumer spending in the first half of the year,’ said Yelena Shulyatyeva, U.S. economist at BNP Paribas, New York.
‘We are looking for a very subdued Q1 reading, and that’s the effect from the fiscal tightening. That will weigh significantly on first-quarter GDP, which we expect at 1.2 percent.
GDP advanced at a 0.1 percent rate in the last three months of 2012, with consumer spending rising at a healthy 2.1 percent annual pace.
Tightening: Savings were also the smallest since 2007 with consumers seeing their smaller paychecks additionally strained by rising gasoline prices
Taking into account the higher taxes that went into effect at the start of the year, the squeeze on households was even greater.
The income at the disposal of households after inflation and taxes plunged a 4.0 percent in January after advancing 2.7 percent in December.
Excluding the unwinding of the dividend and bonus boost, disposable income increased 0.3 percent in January.
Inflation was largely contained, even though gasoline prices pushed higher. A price index for consumer spending was flat for a second straight month.
That left its increase over the past 12 months at 1.2 percent, the smallest since October 2009. It increased 1.4 percent in December.
So-called core prices, which strip out food and energy costs, edged up 0.1 percent after being flat the prior month. The year-on-year gain was 1.3 percent, the smallest since April 2011 and well below the Federal Reserve’s 2 percent target.
The U.S. central bank last year embarked on an open-ended bond buying program and said it would keep it up until it saw a substantial improvement in the outlook for the labor market. It hopes the purchases will drive down borrowing costs.
Weak growth and benign inflation could compel the Fed to maintain it’s very easy monetary policy stance.
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