Consumer Spending Rises, Personal Saving Falls

Americans spent more and saved less in January, says the Bureau of Economic Analysis. Consumer spending increased by 0.5% during the month, while saving declined by 22%. Why did saving plummet? One reason was that personal income increased at a slower rate than spending, at just 0.1%. In fact, disposable personal income declined, by 0.4%. The economic consequences of this data are mixed.

First, why did disposable income decline while overall income increased slightly? I spoke to the BEA to get some clarification. This phenomenon was primarily caused by more taxes. Individuals effectively paid more in taxes due mostly to fewer tax refunds this year. Personal current taxes increased by $59 billion, while personal income only increased by $11 billion. That resulted in a net decline in disposable income of $48 billion. This tax increase is an annual adjustment, so it made for a large month-over-month increase that will result in new base level in the months to come. Personal income will have to overcome this increase in taxes before we see positive disposable income growth in 2010.

Meanwhile, the 0.5% increase in spending was higher than December's 0.3% increase, but matched the increases for October and November. Does this indicate a more optimistic consumer?

It's hard to tell. Interestingly, of the $52 billion more in consumer spending, it was almost entirely (99%) on nondurable goods and services. That means consumers are generally spending on smaller-ticket items. I see this as mixed in terms of confidence. Consumers might still be wary about making big purchases, but buying more nondurables could imply greater discretionary spending.

Given that disposable income declined while consumption increased, it's pretty easy to understand why savings declined. If people are spending a greater portion of their income, then they're saving less. The decline was a whopping $101 billion month-over-month. January had the lowest rate of savings since 2008, according to the Wall Street Journal.

Is this good or bad news? It depends on your perspective. If you believe that consumers need to spend more in order to heat up economic growth, then you probably like today's data. Consumer spending makes up around 70% of the U.S. economy, so unless spending recovers, the broader economy will have a hard time.

Yet, if you think Americans save too little, then you might be disturbed to see spending ramped up while disposable income declined. Still the savings rate remains positive at 3.3% of personal income, so at this time Americans aren't relying on credit on an aggregate basis to spend more.

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