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Personal Income Drops 3.6% In January

10:56 AM, Mar 1, 2013   |    comments
(AP)
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Beth Belton, USA TODAY

WASHINGTON - Personal income growth plunged 3.6% in January, the biggest one-month drop in 20 years, the Commerce Department said Friday. And consumer spending rose just 0.2% with most of it going toward higher heating bills and filling up the gas tank.

The income drop was offset by Americans' savings a hefty 2.6% rise in December. But most of that gain, analysts said, reflected a rush by companies to pay dividends and bonuses before income taxes increased on top earners at the start of 2013.

There were spending declines in January for big-ticket items that last three years or more, like cars and appliances, and non-durable goods, like clothing and food. Some economists said the declines could be blamed on a 2% federal payroll tax cut expired Dec. 31. Income taxes on the wealthiest Americans rose starting Jan. 1.

"With tax hikes and spending cuts buffeting the economy, growth in the first half of the year is likely to be at a sub-2% pace," James Marple, senior economist at TD Economics wrote in a note. "At this pace, the unemployment will not improve and pressure will remain on the Federal Reserve to continue its asset purchase program."

The near-term outlook for spending, which accounts for about 70% of economic activity, isn't upbeat. It rose at a 2.1% pace in the fourth-quarter but forecasts for the first quarter are far below that level. A big part of the decline comes from gas prices. The nationwide average for a gallon of unleaded gas has jumped 50 cents, about 15%, since Jan. 1 to $3.77. Some relief is expected this spring.

"Households absorbed the large drop in income in January by reducing their saving rather than their spending," a research note from Toronto-based Capital Economics research firm said. "But the effects of the payroll tax hike and the latest surge in gasoline prices will continue to constrain consumption in the first quarter."

President Obama has several times this week said companies are already laying off or preparing to lay off workers in response to the government's mandated budget cuts. They go into effect at midnight Friday unless Obama and Congress strike an 11th-hour deal that seems unlikely since many congressional leaders have already left Washington to return to their home states.

January's 0.2% consumer spending gain follows a downwardly revised 0.1% gain in December, Commerce said Friday. Economists were not surprised on the spending front; they had forecast a 0.2% increase.

Contributing: The Associated Press


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