Incomes up, consumer spending flat

By The Associated Press

WASHINGTON – Americans’ income rose in December by the most in nine months, a hopeful sign for the economy after a year of weak wage gains. But consumers didn’t spend any more than they had in November.
Americans ended up saving all their additional income.
Economists noted that income rose last month largely because of strong hiring. The economy added 200,000 jobs in December. More jobs mean more income available to spend.
The best hope for the economy is further job gains. On Friday, the government is expected to report another solid month of hiring for January.
Income rose 0.5 percent from November to December, the Commerce Department said Monday. It was the sharpest increase since a similar gain in March.
The flat spending in December followed scant gains of 0.1 percent in both October and November.
For all of 2011, income barely rose. And consumers tapped their savings to spend more.
But in December, Americans boosted their savings. If they continue to save any additional income rather than spend it, the economy could slow. And that could force employers to pull back on hiring.
Many economists are holding out hope, though, that continued job gains will mean more spending across the economy.
“The pace of job growth in recent months, while still not satisfactory compared to most past cycles, at least seems sufficient to generate enough income growth to keep consumer spending moving ahead at a modest pace,” said Joshua Shapiro, chief U.S. economist at MFR, Inc.
After-tax income adjusted for inflation rose 0.3 percent in December. For the year, inflation-adjusted income rose 0.9 percent. That was just half the rise in 2010.
Inflation-adjusted consumer spending rose just 2.2 percent last year. It was slightly better than the increase in 2010.
Consumer spending was flat in December, even though retail sales rose slightly and retailers reported modest holiday sales.
One reason for the conflicting data is the consumer spending report covers a wider range of goods and services not measured by the retail sales report, such as utilities, airline tickets and hotel rooms.
Joel Naroff, chief economist at Naroff Economic Advisors, also notes that the consumer spending report comes out a few weeks after the retail sale report, so it has more complete data. Nonetheless, Naroff was encouraged by the large gain in income in December. He said it reflected the solid number of jobs created.
Unemployment fell to 8.5 percent last month – the lowest level in nearly three years – after a sixth straight month of solid hiring.
The savings rate increased to 4 percent of after-tax incomes in December, up from 3.5 percent in November. For the year, the savings rate dipped to 4.4 percent from 5.3 percent in 2010. The savings rate had fallen to 1.5 percent in 2005, reflecting a housing boom that made people feel like spending more and saving less.
The December report showed that prices tied to consumer spending edged up 0.1 percent in December and were up 2.4 percent compared to a year ago. This is the preferred inflation measure for the Federal Reserve.