US incomes rise in Dec but consumers hold back on spending

31 January 2013 18:32  [Source: ICIS news]

WASHINGTON (ICIS)--US personal incomes rose by 2.6% in December, the Commerce Department said on Thursday, but much of that gain was laid to accelerated payments to avoid expected higher tax rates in 2013, and consumer spending was flat last month.

In its monthly survey of incomes and outlays, the department said that personal incomes rose by $352.4bn (€260.8bn) in December, a gain of 2.6% from November.

However, despite the additional take-home pay, US consumers were reluctant to spend it, the department’s data indicated.

Consumer spending – what the department calls personal consumption expenditures (PCE) – rose by a marginal $22.6bn last month, a gain of only 0.2% from November.

That narrow advance in consumer spending is noteworthy because December is traditionally a high-volume holiday shopping period.

The 2.6% advance in personal incomes last month was in large part attributed to “accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates”, the report said.

As 2012 drew to a close, there was wide expectation that individual income tax rates would rise sharply as of 1 January 2013 as Bush-era tax cuts were scheduled to expire as part of the so-called fiscal cliff.

It was in consumers’ interests to take as much income as possible during the four weeks remaining in 2012 rather than face possibly much higher tax rates after 1 January.

In the end, Congress and the White House worked out a deal to maintain the Bush-era tax cuts this year for the vast majority of US households, but by then, the accelerated income disbursements had already been made.

Despite that additional income, the data show that consumers were not eager to spend.

That may have contributed in part to the fourth quarter’s economic contraction.

The department reported on Wednesday that US gross domestic product (GDP) fell by 0.1% in the fourth quarter, the first negative growth in the economy since the end of the 2008-2009 recession.

With consumer spending essentially flat in December, economists will be watching for signs that January might reveal similar tight-fisted attitudes, raising prospects for a weak first quarter performance.

($1 = €0.74)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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