Rising income is saved, not spent

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The Wall Street Journal
By: Connor Dougherty
January 31, 2012

Rising income is saved, not spent

Incomes ticked up in December but consumers chose to save instead of spend, suggesting a still-cautious outlook that likely has carried into 2012.

Personal income increased 0.5% in December from November, adjusted for seasonality, the largest monthly increase since March, the Commerce Department said Monday.

This would normally translate into stepped-up spending--and good news for retailers--especially since the gain was propelled by a 0.4% increase in the wage and salary income that is most crucial to consumer spending.

But spending was flat over the month--and actually fell when inflation is factored in. The personal saving rate rose to 4.0% from 3.5% in November.

Consumer spending makes up 70% of economic demand, so the health of workers' paychecks is crucial to the economy's continued recovery. Consumers increased spending through much of the second half of 2011, but only by saving less.

The saving rate, around 5.0% for the first half of 2011, was near 4.0% for much of the second half of the year, with a second-half low of 3.5%. Economists warned that consumers would soon resume socking away cash at the expense of spending, and that appears to be playing out now.

With unemployment still high and the housing market in the doldrums, consumers are reluctant--and in many cases unable--to increase their spending in a big way.

Income after taxes, when adjusted for price increases, was essentially flat in December from December 2010. This was partly because of a midyear jump in food and energy prices "that caused consumers to have to scrimp a little bit," said Mark Vitner, an economist at Wells Fargo Securities.

Consumers have recently gotten some relief on the price front, making it easier to redirect more money to savings. The price index for personal-consumption expenditures increased 0.1% in December, as energy prices retreated. Prices were up 2.4% year-over-year, which is outside the Federal Reserve's comfort zone of 2.0% growth, but much less than the 2.9% rate seen in September.

Data released Friday showed the economy expanded at a 2.8% annual rate in the last three months of 2011, but much of that came from companies restocking their shelves, a development that is unlikely to continue. This makes it even more crucial that employers continue to add jobs, raising the stakes for the government's first employment report on the year, which will be released Friday.

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This page contains a single entry by CFED published on January 31, 2012 4:03 PM.

Many Marylanders living without a financial safety net was the previous entry in this blog.

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