Updated March 25 at 2:33pm
economic indicators

Consumer spending in U.S. climbs even as taxes hurt incomes


WASHINGTON – Consumer spending in the U.S. rose in January even as incomes dropped by the most in 20 years, showing households were weathering the payroll-tax increase by socking away less money in the bank.

Household purchases, which account for about 70 percent of the economy, climbed 0.2 percent after a 0.1 percent gain the prior month, a Commerce Department report showed today in Washington. The median estimate in a Bloomberg survey of 76 economists called for a 0.2 percent advance. Incomes slumped 3.6 percent, sending the saving rate down to the lowest level since November 2007.

Employment gains, the rebound in housing and growing demand for autos will probably keep supporting consumer spending in the first quarter as the world’s largest economy picks up from an end-of-year slowdown. Even so, rising gasoline prices and the need to rebuild nest eggs may make it difficult for households to match last quarter’s performance.

“It could have been worse,” Michael Feroli, chief U.S. economist at JPMorgan Chase in New York, said before the report. “The labor market looks like it’s moving forward -- it’s not smoking but it is generating labor income. And equity and house prices are both up, so that’s obviously going to be helpful.”

Feroli added that “it’s probably going to be a tough couple months” ahead for consumer spending. “The downside is taxes and gas.”

Projections for spending ranged from a drop of 0.2 percent to a 0.4 percent gain.

The Bloomberg survey median called for incomes to fall 2.4 percent.

Incomes slump

The slump in incomes last month was the biggest since January 1993 and followed a 2.6 percent jump in December. Some companies paid dividends and employee bonuses earlier than usual before tax rates went up this year, removing a gain usually seen in January. The Commerce Department estimated the January level of wages was reduced by about $15 billion and December was boosted by about $30 billion, reflecting the timing of the bonuses.

The saving rate dropped to 2.4 percent from 6.4 percent. Disposable income, or the money left over after taxes, dropped 4 percent after adjusting for inflation, the biggest plunge since monthly records began in 1959.

Consumer purchases grew at a 2.1 percent annualized pace in the fourth quarter, up from 1.6 percent in the previous three months, as Americans bought more durable goods including automobiles.

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