What's wrong with this picture? Consumer spending up but saving down

03/01/2010 9:17 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The Commerce Department announced today (March 1) that consumer spending rose by 0.5% in January.

But that personal income fell by 0.1%.

The report pretty much sums up everything that worries me about the economy.

It’s great news that consumer spending climbed in January for the fourth straight month. January’s 0.5% increase was ahead of the 0.4% growth that economists were expecting according to a Bloomberg survey. (Consumer spending accounts for 60% to 70% of U.S. economic activity.)

January’s number was an increase from the 0.3% revised growth reported for December. For the fourth quarter of 2009 as a whole, consumer spending grew at an annual 1.7% rate.

Where is this increased spending coming from?

Sure not from growing incomes. Personal income grew by just 0.1% in January after growing by 0.3% in December. Economists had expected as 0.4% increase in incomes.

Real disposable income, that’s income after subtracting taxes and correcting for inflation, actually dropped by 0.6% in January.

Right now it looks like the money for this growth in consumer spending is coming out of savings. The savings rate in January fell to 3.3%. That’s the lowest reading since October 2008. And it’s down from 4.2% in December.

I don’t think you can get long-term spending growth from that source. (The most recent credit card numbers show that consumers are still paying down debt.)

Which leaves the trend in consumer spending at the mercy of the unemployment rate. When that jobless number starts to fall and more people are back at work, consumers will have more personal income to spend and the improving economic picture will make them more likely to spend it.

That’s why the “when” of lower unemployment—and the experts have started to push the “when” off into 2011—is so important for the pace of the economic recovery as a whole.

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