Growth in Consumer Spending Slows

WASHINGTON — American consumers increased their spending in December at a slower pace, while their income grew by the largest amount in eight years, the Commerce Department said Thursday. Income surged because companies rushed to pay dividends and bonuses before tax increases.

The 0.2 percent rise in consumer spending last month was slightly slower than the 0.4 percent increase in November.

Income jumped 2.6 percent in December from November, the biggest gain since December 2004.

Economists expect consumer spending, which accounts for about 70 percent of economic activity, to slow this year. That’s because consumers are receiving less take-home pay starting this month.

Congress and the White House reached a deal on Jan. 1 to prevent income taxes from rising on all but the wealthiest Americans. But they allowed a temporary reduction in Social Security taxes to expire this year. That means a person earning $50,000 a year will have about $1,000 less to spend in 2013. A household with two high-paid workers will have up to $4,500 less.

The diminished pay could slow consumer spending and economic growth at a precarious moment.

The economy unexpectedly shrank in the October-December period at an annual rate of 0.1 percent, the government said Wednesday. The dip was a reminder of the economy’s vulnerability as automatic cuts in government spending loom.

Some analysts have estimated that the roughly $120 billion in higher Social Security taxes could subtract up to 0.7 percentage point from growth this year.

Separately, the Labor Department reported Thursday that the number of Americans seeking unemployment aid rose sharply last week but remained at a level consistent with moderate hiring.

Weekly applications for unemployment benefits leapt 38,000 to a seasonally adjusted 368,000, the government said. The increase comes after applications plummeted in the previous two weeks to five-year lows.

The volatility reflects the government’s difficulty adjusting the data to account for layoffs after the holiday shopping season. Job cuts typically increase in the second week in January as retailers dismiss temporary employees hired for the winter holidays. Layoffs then fall in the second half of the month.

The department attempts to adjust for such fluctuations but the January figures can still be volatile. The four-week average, a less volatile measure, ticked up to 352,000, just above a four-year low.

On Friday, the government is scheduled to issue its January jobs report. Analysts forecast that it will show employers added 155,000 jobs, the same as in December. The unemployment rate is expected to remain at 7.8 percent for the third straight month.

Article source: http://www.nytimes.com/2013/02/01/business/growth-in-consumer-spending-slows.html?partner=rss&emc=rss