Incomes suffer biggest drop in TWENTY years, alarming new figures show

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  • 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

By  Daily Mail Reporter

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 

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 

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 

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.

Read more: http://www.dailymail.co.uk/news/article-2286615/Incomes-suffer-biggest-drop-TWENTY-years-alarming-new-figures-show.html#ixzz2MMazlpQV Follow us: @MailOnline on Twitter | DailyMail on Facebook



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