Income levels for Americans fell in January by the largest percentage in twenty years, but it didn’t deter individuals from spending more, according to a Commerce Department report issued on Friday, March 1, 2013.
Personal incomes dropped by 3.6 percent in January, reversing the upward tick from December, 2012. Higher income taxes and an already robust income distribution in December contributed to January’s decline.
In the majority of instances, when pay declines, consumers cut back on spending. But this time around, the opposite occurred- spending in January actually increased. The Commerce Department reported that personal consumption spending in January climbed by 0.2% and was up in most areas, particularly services. Large, expensive items like automobiles saw lower sales, but less expensive consumables were purchased with greater frequency in spite of the loss of spending power.
With incomes trending lower and spending trending higher, where are Americans finding the necessary cash to pay for these goods and services? Apparently, it is coming from household savings and investments. Personal savings fell to a paltry 2.4% in January, down sharply from 6.4% the previous month. This is the lowest monthly savings rate since November, 2007 and is cause for concern. Some may recall that household savings rates plummeted between 2000 and 2007, helping contribute to the severity of the Great Recession.
Social Security and other taxes moved higher in January and they helped contribute indirectly to the lower income for the month. However, it is highly probable that the greater spending can be attributed to the increases in income, dividends, bonuses, etc., that occurred in December. Add up all the economic indicators and the month of February could be a bleak one for the U.S. economy, at least in regards to spending, which accounts for a large part of economic growth. Economists, government officials, and others will be watching closely when February’s financial statistics are released next month.
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