Consumer spending falls just 0.2 percent despite fuel plunge

Consumer spending in the US fell for a second straight month in January, declining 0.2 percent. But since it was driven by a big drop in gas prices, the decline should prove to be a positive for the economy, analysts say. 

Richard Vogel/AP/File
A shopper pays for produce at a Farmers Market in downtown Los Angeles. Consumer spending, which accounts for 70 percent of economic activity, slid just 0.2 percent in January, the Commerce Department reported on Monday, March 2, 2015.

Consumer spending fell for a second consecutive month in January, weakness that was expected to be temporary. Income rose, reflecting strong job gains during the month.

Consumer spending declined 0.2 percent in January following a 0.3 percent drop in December, the Commerce Department reported Monday. Economists had expected a dip, reflecting a big drop in gas prices during the month. That decline should prove to be a positive for the economy, giving consumers more money to spend on other goods.

"The January data on personal income and spending were modestly softer than our expectation in nominal terms, but after adjusting for inflation, we view them as indicating that households are still receiving a boost from falling energy prices," Barclays Research economist Michael Gapen wrote in an e-mailed analysis. "We expect the support for income and spending from lower energy prices to continue to dissipate in the months ahead."

Income grew 0.3 percent in January as wages and salaries increased a strong $42.4 billion. Analysts expect that solid job gains and low unemployment will bolster consumer spending and lift economic growth this year to what they predict will be the fastest pace in a decade.

Consumer spending, after removing the impact of price changes, actually rose a solid 0.3 percent in January and after-tax income, after removing inflation, was up 0.9 percent. Paul Ashworth, chief U.S. economist at Capital Economics, said the surge in inflation-adjusted income showed the support households will be getting from falling energy prices.

"Even though households didn't take full advantage of their savings on gasoline in January, they still have a lot of scope to increase real consumption in the first half of the year," Ashworth said.

The combination of falling spending and rising income translated into an increase in the personal saving rate, which climbed to 5.5 percent of after-tax income, up from 5 percent in December and the highest level since late 2012.

The January report is the first look at consumer spending for the first quarter of this year. Economists examine consumer spending closely since it accounts for 70 percent of economic activity.

The government last week revised its estimate for overall economic growth as measured by the gross domestic product to a slower pace of 2.2 percent in the October-December quarter, down from an initial estimate of 2.6 percent growth in the fourth quarter.

The downward revision reflected less spending by businesses to restock their inventories and a bigger trade deficit than initially estimated.Consumer spending remained strong during the fourth quarter, rising at an annual rate of 4.2 percent. That was the best showing since early 2006.

Economists expect the overall growth this year will top 3 percent, the best performance in a decade. That optimism is based on a belief that a stronger job market will boost incomes and that will in turn support solid gains in consumer spending.

of stories this month > Get unlimited stories
You've read  of  free articles. Subscribe to continue.

Unlimited digital access $11/month.

Get unlimited Monitor journalism.