US incomes down 3.6 percent in January as payroll-tax relief expires

The Commerce Department report indicated a worse decline than economists were expecting. And it comes as the economy appears set to take another hit – the 'sequester.'

Nam Y. Huh/AP/File
A woman shops at a Nordstrom store in Chicago in January. US consumers increased spending modestly in January despite reduced incomes.

Personal income fell 3.6 percent in January, as a jump in payroll taxes affected workers' paychecks.

The number, given by the Commerce Department Friday, was a worse decline in incomes than economists had expected. And it came as the economy appears set to take another hit – this time from the “sequester” rollback of federal spending.

One risk is that stagnating incomes could result in lower consumer spending, which is typically a vital engine for economic growth. 

In January, at least, that didn’t happen.

“Households responded to this hit to income by reducing their savings,” rather than by reducing their purchases, Paul Dales of Capital Economics said in a written analysis of the report.

But even though consumer spending went up a bit for January, weakness in incomes suggests a very tepid climate for household spending, he said.

Late last year, consumer spending grew at an annual rate of about 2 percent. It might be considerably slower than that early in 2013.

Through 2011 and 2012, Americans had been enjoying temporary relief from a portion of the Social Security payroll tax. The tax relief, which amounted to 2 percent of workers' paychecks, expired Jan. 1.

January’s downshift in personal income, the sharpest one-month dive in 20 years, also stemmed from an unusual income gain in December. Some corporations boosted the amount of stock dividends paid to investors at the end of the year. So December’s number was tough for January to match.

Here’s some good news in the report: Commerce Department analysts said that, excluding such “special factors,” disposable income rose by $37.6 billion, or 0.3 percent, in January – similar to the month before.

Overall, though, the report confirms that the job market is yielding smaller gains in income than the norm.

Real disposable income increased 1.5 percent in 2012, slightly better than a 1.3 percent gain in 2011, according to an analysis by economists at Wells Fargo, citing the Commerce numbers.

Similarly, the Federal Reserve reported this week that nominal compensation per hour (a number that’s not adjusted for inflation) rose only 2.5 percent during the four quarters of 2012. Annual compensation rises were higher – more like 4 percent – in the years prior to the recession.

The expired payroll tax affected all workers, and the sequester will also affect federal employees' paychecks. Incomes will be reduced for government employees who are furloughed, and it is expected to indirectly slow the pace of growth in the overall economy.

Despite the changes in taxes and government spending, economists are predicting modest growth in the economy rather than a recession.

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