Spending up, incomes down--how long does that work?

03/01/2013 2:23 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

This sure isn’t sustainable.

 

In January, according to data the Commerce Department released this morning, personal income fell by 3.6%. That’s worse than the 2.4% drop expected by economists surveyed by Briefing.com, and worse that the 2.6% drop in December. It was the biggest drop since January 1993.

Personal spending, however, rose in January by 0.2%. That was equal to the 0.2% increase in December and matched economists’ expectations.

You don’t have to look far to find a reason for the drop in income: the expiration of the payroll tax cut as a result of the fiscal cliff deal took a bite out of paychecks. (Also in December companies rushed to pay dividends and bonuses before projected changes in tax rates in 2013. Income from these categories dropped in January as a result of the early payouts.)

And you don’t have to scramble to find out where the money for increased spending—even as incomes fell—came from. The savings rate—the percentage of disposable income households don’t spend—fell to 2.4%. That's the lowest rate since November 2007.

None of this bodes well for February or March when higher tax rates will still be in effect, family savings will be spent down (at least a little), and the effects of government spending cuts from the sequester that started today will have started to spread through the U.S. economy.

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