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Incomes up strong 0.5 percent, consumer spending flat

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.

By MARTIN CRUTSINGER
The Associated Press

1/30/2012

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.

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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.

Consumer spending accounts for about 70 percent of economic activity.

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.

The government said Friday that the economy grew at an annual rate of 1.7 percent last year — roughly half the growth of 2010. It was the weakest showing since the economy contracted in 2009.

Unemployment stands at 8.5 percent — its lowest level in nearly three years after a sixth straight month of solid hiring.

For the final three months of 2011, Americans spent more on vehicles, and companies restocked their supplies at a robust pace.

Still, overall growth last quarter — and for all of last year — was slowed by the sharpest cuts in annual government spending in four decades. And many people are reluctant to spend more or buy homes. Many employers remain hesitant to hire, even though job growth has strengthened.

The outlook for 2012 is slightly better. The Federal Reserve has estimated economic growth of roughly 2.5 percent for the year, despite abundant risk factors: federal spending cuts, weak pay increases, cautious consumers and the risk of a European recession.

In December, spending on both durable and nondurable goods fell. Spending on services, a category that accounts for two-thirds of consumer spending, rose 0.2 percent.

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.

The Fed last week established an annual inflation target of 2 percent.

Kevin Jones of The Trucker staff can be reached for comment at kevinj@thetrucker.com.

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