US consumer spending increases as income drops most in 20 years

The Commerce Department said on Friday consumer spending increased 0.2 percent in January after a revised 0.1 percent rise the prior month. Spending had previously been estimated to have increased 0.2 percent in December.

January's increase was in-line with economists' expectations. Consumer spending accounts for about 70 percent of U.S. economic activity and when adjusted for inflation, it gained 0.1 percent after a similar increase in December.

Though spending rose in January, it was supported by a rise in services, probably related to utilities consumption after a cold snap during the month.

Spending on goods fell, suggesting some hit from the expiration at the end of 2012 of a 2 percent payroll tax cut. Tax rates for wealthy Americans also increased.

“We expect a significant decrease in real consumer spending in the first half of the year,” said Yelena Shulyatyeva, U.S. economist at BNP Paribas, New York.

“We are looking for a very subdued Q1 reading, and that's the effect from the fiscal tightening. That will weigh significantly on first-quarter GDP, which we expect at 1.2 percent.

GDP advanced at a 0.1-percent rate in the last three months of 2012, with consumer spending rising at a healthy 2.1-percent annual pace.

Income tumbled 3.6 percent, the largest drop since January 1993. Part of the decline was payback for a 2.6-percent surge in December as businesses, anxious about higher taxes, rushed to pay dividends and bonuses before the new year.

Taking into account the higher taxes that went into effect at the start of the year, the squeeze on households was even greater. The income at the disposal of households after inflation and taxes plunged 4 percent in January after advancing 2.7 percent in December.

Excluding the unwinding of the dividend and bonus boost, disposable income increased 0.3 percent in January.

With income dropping sharply and spending rising, the saving rate - the percentage of disposable income households are socking away - fell to 2.4 percent, the lowest level since November 2007. The rate had jumped to 6.4 percent in December.

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