WASHINGTON - Americans increased their spending at a solid pace for the second straight month in December even though their income was flat.
Consumer spending rose 0.4 percent in
December, compared with November when spending had increased an even stronger
0.6 percent, the Commerce Department reported Friday. That was the best gain in
Income, however, showed no gain at all
in December after a 0.2 percent rise in November. Wages and salaries were
basically flat last month, reflecting a sharp slowing in employment growth.
For all of 2013, income growth was 2.8
percent, the weakest performance since 2009 when income fell 2.8 percent as the
country struggled with a deep recession.
Economists are hoping that stronger
economic growth will promote stronger employment and income gains this year.
The combination of stronger spending
in December but no improvement in income meant that consumers tapped savings to
finance their spending. The saving rate slipped to 3.9 percent of after-tax
income in December, down from 4.3 percent in November. It was the lowest
monthly saving rate since it dropped to 3.6 percent last January.
For the year, the saving rate slipped
4.5 percent, the lowest level since the rate was 3 percent in 2007. The saving
rate had fallen before the Great Recession as surging home prices made
Americans feel wealthier and more willing to spend more and save less. However,
once the recession took hold and millions of Americans lost their jobs while
home prices plunged, Americans became more frugal and the saving rate rose,
peaking at 6.1 percent in 2009 and remaining above 5 percent for the next three
Consumer spending is closely watched
because it accounts for 70 percent of economic activity.
For the October-December quarter,
consumer spending was rising at the fastest pace in three years, giving
economists hope that the economy has finally turned the corner to faster growth
after a prolonged period of sub-par activity since the recession ended in June
Consumers have been buying durable
goods such as cars as well as non-durable products such as clothing.
While the overall economy grew just
1.9 percent in 2013, some analysts think growth could accelerate to around 3
percent this year. If it does, 2014 would be the best year for growth since the
This year, economists think the U.S.
economy will get a lift from continued gains in hiring. Further steady job
growth would give more households money to spend and help increase consumer
In addition, U.S. manufacturers are
expected to gain from rising global demand. And housing construction and auto
sales are expected to strengthen further in 2014.
Stronger growth and the improving job
market are the primary reasons the Federal Reserve is pressing ahead with a
plan to scale back its economic stimulus.
Most forecasters think the economy
will manage to withstand such factors as turmoil in emerging economies, which
have been rattled by the pullback in the Fed's stimulus and the prospect of
higher U.S. interest rates.
One major reason for optimism: A
belief that the government will be less of a drag than in 2013, when higher
federal taxes and spending cuts trimmed overall growth by an estimated 1.5
A budget deal Congress approved
earlier this month halted tens of billions in additional spending cuts that
were due to kick in this year.
Many global investors are concerned
that the Fed's pullback in its bond purchases will raise U.S. interest rates
and cause investors to shift money out of emerging markets and into the United
States for higher returns. Currency values in emerging economies have fallen
over that concern.
Many analysts think the Fed will keep
paring its support at each of its meetings this year until it eliminates new
bond purchases entirely in December. In making the announcement Wednesday of
another $10 billion reduction in bond purchases, the Fed cited an improving
economy, including more strength in consumer and business spending.
However, some Fed officials have
expressed concerns about withdrawing economic support while prices are rising
at such a sluggish rate. While high inflation can be a problem, the Fed also
worries if prices are rising too slowly, a development that raises the prospect
of deflation. That can also do serious harm to an economy.
For December, prices measured by an
inflation gauge tied to consumer spending rose a modest 0.2 percent, compared
with November, and were up just 1.1 percent for the entire year, well below the
Fed's 2 percent inflation target.