Consumer spending outpaces personal income - East Valley Tribune: Business

Consumer spending outpaces personal income

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Posted: Wednesday, March 1, 2006 10:32 am | Updated: 3:20 pm, Fri Oct 7, 2011.

WASHINGTON - Consumers, lured out to the stores by the warmest January in more than a century, spent at a rapid clip that outpaced their incomes. However, construction activity slowed to the slowest gain in seven months, indicating the nation's housing boom is easing.

The Commerce Department reported Wednesday that personal spending shot up by 0.9 percent, the strongest gain in six months, while incomes rose by a solid 0.7 percent.

But in a separate report, the department said that construction spending rose by a tiny 0.2 percent in January, the weakest gain in seven months and far below the 1 percent increase Wall Street had been expecting.

A big reason for the slowdown was a tiny 0.1 percent increase in private home building, far lower than the 0.9 percent surge in December. Economists believe housing, which has been setting sales records for five straight years, is set to slow this year. Sales of both new and previously owned homes fell in January despite the unusually warm weather.

In a third report, a private research group said that manufacturing in the United States expanded at a slightly faster rate in February than in January.

The Institute for Supply Management said its closely followed index of manufacturing activity stood at 56.7 in February. That was a better-than-expected improvement from a January reading of 54.8 and signaled that manufacturing should contribute to economic growth in the first quarter.

The bigger rise in spending compared to incomes kept the personal savings rate in negative territory at a minus 0.7 percent. That meant Americans spent more than their after-tax incomes, which forced them to dip into prior savings or increase their borrowing.

For all of 2005, the savings rate registered a negative 0.4 percent, the first time the savings rate has been in negative territory for an entire year since the Depression years of 1932 and 1933.

The small 0.2 percent increase in building activity left construction spending at a seasonally adjusted annual rate of $1.163 trillion in January, a record level. The construction figures are not adjusted for inflation.

The 0.1 percent rise in private home building was the weakest showing since spending on home construction actually fell by 0.4 percent last June.

Economists say that this is exactly the wrong time for the savings rate to dip into negative territory with the impending retirement of 78 million baby boomers.

Part of the reason for the dip is that Americans who own homes felt more wealthy in recent years given the huge increases in home values. That spurred them to spend more of their paychecks since their net worth was increasing with their rising home values.

However, the Federal Reserve reported last week that even with the rise in home values, Americans' net worth rose over the past three years at the slowest pace in more than a decade, reflecting in part reduced investments in the stock market since the bursting of the Internet stock bubble at the beginning of the decade.

The 0.7 percent rise in incomes in January followed a 0.5 percent December increase. It was the largest gain since a 3.1 percent surge in September that reflected the way the government accounted for insurance payments following Hurricane Katrina.

The January increase was bolstered by a number of special factors including a cost-of-living increase for Social Security beneficiaries, the start of the new Medicare drug payment plan and pay raises for federal workers. Without the various special factors, personal income would have risen a smaller 0.4 percent in January.

The 0.9 percent rise in consumer spending followed a strong 0.7 percent increase in December and was the biggest gain since a 1.4 percent surge last July, a month when consumers flocked to auto showrooms to take advantage of extremely attractive incentive offers.

January sales were bolstered by the warm weather, which lured shoppers to the malls, and by a rebound in auto sales.

Disposable income, the amount left after paying taxes, rose by 0.5 percent last month. The personal savings rate, the amount left after subtracting spending from disposable incomes, dipped to a negative 0.7 percent in January compared to a negative 0.4 percent in December.

An inflation gauge closely watched by the Federal Reserve showed that prices excluding energy and food rose by 1.8 percent for the 12 months ending in January, a slight improvement from a 1.9 percent increase for the 12 months ending in December.

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