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Personal income drops, but consumer spending up in January

The US Commerce Department released its figures for the first month of the new year Friday.

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In this file photo, Lana Nguyen, right, holds up a shirt while helping friend Chris Ghiathi, left, shop in an H&M store, in Atlanta.

David Goldman/AP/File

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US consumers increased spending modestly in January but cut back on major purchases that signal confidence in the economy. The decline in spending on goods suggests higher tax rates that kicked in on Jan. 1 may have made consumers more cautious.

The Commerce Department said Friday that consumer spending rose 0.2 percent in January compared with December. The gain was driven by an increase in spending on services, partly reflecting higher heating bills. Spending on durable goods, such as cars and appliances, fell 0.8 percent. Spending on non-durable goods, such as clothing, was essentially flat.

Income plunged 3.6 percent in January, the biggest drop since January 1993. But it followed a 2.6 percent rise in December, which reflected a rush by companies to pay dividends and bonuses before income taxes increased on top earners.

After-tax income fell 4 percent in January and after having risen 2.7 percent in December. Part of the January drop reflected higher Social Security taxes.

Americans adjusted to higher taxes by saving less. The savings rate declined to 2.4 percent of after-tax income in January, down from 6.4 percent in December and the lowest in five years.

"The sting of higher taxes hit home at the start of the year. This will cool spending in the next few months before consumers adjust to higher rates," predicted Jennifer Lee, senior economist at BMO Capital Markets.

In January, Congress and the White House allowed a temporary 2 percentage point cut in Social Security taxes to expire. That means a person earning $50,000 a year will have about $1,000 less to spend in 2013. A household with two high-paid workers will have up to $4,500 less.

Lawmakers and the Obama administration also agreed to let income tax rates rise on top-earning Americans.

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