Incomes up, consumer spending flat


Income rose 0.5 percent, the Commerce Department said Monday. It was the strongest increase since a similar gain in March.

The flat spending in December followed weak gains of 0.1 percent in both October and November.

The report underscored the challenge facing the economy in 2012. For all of 2011, income barely rose, while consumers dipped into their savings to spend more.

Unless income grows more rapidly, consumers will be forced to cut back further on spending. That would slow growth and result in less hiring.

Still, economists noted that income rose largely because of a strong month of hiring. The economy added 200,000 net jobs in December.

The best hope for the economy is more job growth. On Friday, the government is expected to report another solid month of hiring for January.

"The pace of job growth in recent months, while still not satisfactory compared to most past cycles, at least seems sufficient to generate enough income growth to keep consumer spending moving ahead at a modest pace," said Joshua Shapiro, chief U.S. economist at MFR, Inc.

After-tax income adjusted for inflation rose 0.3 percent in December. For the year, inflation-adjusted income rose 0.9 percent, just half the rise in 2010.

Inflation-adjusted consumer spending rose just 2.2 percent last year -- only slightly better than the increase in 2010.

The government reported Friday that the economy grew at an annual rate of 1.7 percent last year -- roughly half the growth of 2010. It was the weakest showing since the economy contracted 3.5 percent in 2009.

Unemployment stands at 8.5 percent -- its lowest level in nearly three years after a sixth straight month of solid hiring.

For the final three months of 2011, Americans spent more on vehicles, and companies restocked their supplies at a robust pace.

Consumer spending is closely watched because it accounts for 70 percent of economic activity.

Still, overall growth last quarter -- and for all of last year -- was slowed by the sharpest cuts in annual government spending in four decades. And many people are reluctant to spend more or buy homes, and many employers remain hesitant to hire, even though job growth has strengthened.

The outlook for 2012 is slightly better. The Federal Reserve has estimated economic growth of roughly 2.5 percent for the year, despite abundant risk factors: federal spending cuts, weak pay increases, cautious consumers and the risk of a European recession.

In December, spending on both durable and nondurable goods fell. Spending on services, a category that accounts for two-thirds of consumer spending, rose 0.2 percent.

The savings rate increased to 4 percent of after-tax incomes in December, up from 3.5 percent in November.

For the year, the savings rate dipped to 4.4 percent from 5.3 percent in 2010. The savings rate had fallen to 1.5 percent in 2005, reflecting a housing boom that made people feel like spending more and saving less.

The December report showed that prices tied to consumer spending edged up 0.1 percent in December and were up 2.4 percent compared to a year ago. This is the preferred inflation measure for the Federal Reserve.

The Fed last week established an annual inflation target of 2 percent.

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