Latest data show personal income growth at its weakest since 2010 — just a 2.2% increase year over year.
Consumers attempted to maintain spending despite the hit to income by dramatically reducing savings.
Higher taxes and rising gas prices will slow consumer spending.
Over the last three months, Personal Income measures have been affected by a variety of factors that make comparisons to prior periods quite difficult. Recall that there was a boost in dividends and bonuses paid out in November and December to beat the higher tax rates that took effect in 2013 that were associated with the fiscal cliff. While this caused December Personal Income to surge 2.6% (and November to spike 1.0%), these were only advanced from January, when the effects would reverse. January then felt the impact of the expected hike in payroll taxes in addition to increased health care taxes.
The U.S. Bureau of Economic Analysis (BEA) reported that Personal Income fell 3.6% in January. And Real Disposable Personal Income fell 4%, more than reversing the prior month’s gains. Absent the special factors, the BEA estimates Disposable Personal Income would have increased 0.3% in December and January. But this still leaves income growth much weaker after the tax bite, with the year-over-year rate now rising only 2.2%, the weakest result since 2010. In addition, the BEA has not yet incorporated other January tax hikes for 2013, so a further drag is likely in the period ahead.
Consumers attempted to maintain spending despite the hit to income by dramatically reducing savings. As a result, the savings rate plunged to 2.4%, the lowest level since November 2007. Savings rates had been averaging near 3.5% for much of last year but vaulted higher to 6.4% in December, as most of the one-time gains were saved and not spent. This low level of savings is not likely to be sustained and points to some drag on spending until savings are built up. Further, the ongoing dent to paychecks from higher taxes serves as another brake on spending, although the effect will likely be lagged. Rising pump prices are the final weight on consumer spending rounding out what is expected to be a weak first half of this year.