Spending grows 0.5 pct in January while incomes lag, raising worries about economic recovery

By Martin Crutsinger, AP
Monday, March 1, 2010

January spending increases but income growth slows

WASHINGTON — Personal spending jumped by a larger amount than expected in January but Americans’ incomes barely budged as millions of Social Security recipients did not get their usual cost of living boost. The weak income growth could depress spending in the months ahead, acting as a further drag on the fragile economic recovery.

The Commerce Department said Monday that personal spending rose by 0.5 percent in January, slightly better than expected. But incomes edged up only 0.1 percent, significantly lower than the 0.4 percent gain that economists had expected.

The income gain was the weakest showing in four months and raised more concerns about whether consumers will be able to keep spending at a sufficiently strong pace to support an economic rebound. Consumer spending is closely watched because it accounts for 70 percent of total economic activity.

The 0.1 percent rise in incomes was below the 0.4 percent gain that economists had expected. The weakness came even though private wages and salaries were up by $16.1 billion at an annual rate, compared to a $2.3 billion gain in December.

However, households did not get the usual boost they see from the government’s annual cost-of-living adjustment for Social Security and other benefits. The 50 million recipients of Social Security saw no gain at all in Janury because of low inflation, the first time that has occurred in more than three decades. In January 2009, incomes had risen at an annual rate of $41.1 billion because of that year’s cost of living adjustment.

For the past two years, income growth has been held back by job losses caused by the worst recession since the 1930s. For all of 2009, personal incomes actually fell by 1.7 percent, the weakest showing since the Great Depression year of 1938, when incomes had fallen by 7.7 percent.

In January, after-tax incomes actually dropped by 0.4 percent, the biggest monthly decline since last July.

With after-tax incomes falling as spending increased, the personal savings rate dipped to 3.3 percent in January, down from 4.2 percent in December. For all of 2009, the savings rate had risen to 4.3 percent, the highest annual savings rate since 1998.

The dip in the savings rate in January was seen as temporary blip. Economists believe the savings rate will continue rising as households struggle to cope with the continued threat of job layoffs by rebuilding their tattered balance sheets.

Inflation continued to be a no-show. A price gauge tied to personal consumption edged up a small 0.2 percent in January and was unchanged when volatile food and energy prices were removed.

The government said Friday that the overall economy, as measured by the gross domestic product, grew at an annual rate of 5.9 percent in the final three months of last year, the strongest growth in six years. However, economists believe that growth spurt, powered by a swing in business inventories, has slowed sharply since that time.

Top forecasters surveyed by the National Association for Business Economics believe the economy is expanding at about half the fourth quarter pace in the current January-March quarter. They expect GDP growth will remain around 3 percent for the rest of the year. It is this modest growth pace that has led economists to believe little progress will be made this year in reducing the nation’s jobless rate, which currently stands at 9.7 percent.

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