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Consumer Spending Stalled Despite Higher Incomes

Consumer Spending Stalled Despite Higher Incomes

Consumer Spending Stalled Despite Higher Incomes

According to the U.S. Commerce Department, consumer spending remained flat last month, despite the biggest increase in household income in nine months.

Economists surveyed by the Reuters news agency had expected to see spending increase by about 0.1 percent in December. Consumer spending, which accounts for approximately 70 percent of all economic activity in the U.S., increased by 4.7 percent — the largest yearly increase since before the economic meltdown in 2008.

December spending actually fell 0.1 percent when adjusted for inflation. Consumer spending increased by a modest 0.1 percent in November, capping three straight months of gains.

On Friday, the U.S. government reported that consumer spending during the fourth quarter of 2011 grew at an annualized pace of 2.0 percent. That increase helped boost the nation’s gross domestic product by 2.8 percent, up from 1.8 percent during the third quarter.

Income and Employment Improving

Most economists fear that unless household incomes grow at a more rapid rate, consumers will continue to tighten their belts which would likely lead to a decrease in hiring. In December the U.S. economy netted 200,000 jobs and most economists are optimistic about the January numbers.

Wages increased by 0.5 percent, surpassing the 0.4 percent increase many economists had predicted. Wages increased by only 0.1 percent in November.

Disposable income and saving both moved higher in December. Inflation-adjusted disposable income increased by 0.3 percent after remaining flat in November and the saving rate climbed to 4.0 percent in December, up from 3.5 percent in the previous month.

Government Spending Also Down

Overall economic growth during the fourth quarter was slowed by the deepest cuts in government spending in over four decades. Many employers are also hesitant to hire, although the unemployment rate has fallen to 8.5 percent — the lowest level in nearly three years.

Inflation also remained in check in December. According to the Commerce Department report, the savings rate fell to 4.4 percent in 2011, down from 5.3 percent in 2010. In 2005, the savings rate fell to 1.5 percent, due largely to the housing boom. That boom, of course, went bust in 2007 and 2008.

The Federal Reserve has estimated that the economy will grow at 2.5 percent in 2012.

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