Income up, spending slows, says Commerce Dept. report

A Commerce Dept. report on the economy brings good news and bad news. On the downside, spending slowed as workers anticipated increased payroll taxes. On the upside, American incomes for December were at their highest in eight years. But only because employers paid out dividends early, fearing tax hikes. Perhaps there is no good news after all.

Commerce dept. report issued Jan. 31

The government report, issued Thursday, January 31, said that consumer spending grew by 0.2 percent in the last month of 2012. A month earlier, it was growing at a rate of 0.4 percent. Meanwhile, consumer incomes increased 2.6 percent. That is the sharpest growth since December, 2004. Some say, however, that is only the result of companies rushing to pay out dividends before the end of the year, fearing an income tax hike on the nation’s higher-earners.

An industry report last week showed a sharp decrease in consumer confidence, spurred by lower paychecks in the wake of increased Social Security taxes. That tax hike arrives as a payroll tax holiday comes to a close. Anticipation of that event is likely driving at least some of the slow-down in spending.

Reduced paychecks

The average American worker is now paying about two percent more for Social Security than he or she did last year. That amounts to around $1,000 less take-home pay for a person earning $50,000 annually.

Economists say consumer spending will remain slow for the first half of the year.

Other discouraging indicators

Economic growth also dipped in the wake of the so-called “fiscal cliff” deal struck by the White House and Congress on Jan. 1. A separate Commerce Dept. report said the economy contracted between October and December, to a yearly growth rate of just 0.1 percent.

The Labor Department also reported on Thursday, January 31, that the number of out-of-work Americans seeking the help of Unemployment Insurance sharply increased — from 38,000 to a seasonally adjusted 368,000 — in the previous week. The increase is all the more discouraging following the five-year record drop in claims in the two prior weeks.

Seasonal fluctuations account for some volatility

One bright note, the numbers may reflect to some degree seasonal volatility often seen in the final month of the year with holiday spending dropping off and seasonal employees being let go.

The government is poised to issue its January jobs report on Feb. 1. Economists predict it will show the same job growth as in the previous month — around 155,000 new jobs — while the unemployment rate is expected to hover at an inadequate 7.8 percent.

Sources

Daily Finance
New York Times
SF Gate