Consumer spending report shows improved savings rate

Piggy bank

Americans are saving more, even though the average income is inching up. Image: Flickr / krasi / CC-BY

Each month, the federal government releases a report on consumer saving and spending rates. These two rates are seen as indicators of consumer sentiment and economic growth. The January spending report is also being seen as a referendum on the payroll tax cut.

January personal income

The United States Commerce Department’s monthly report on personal income and spending contained a few surprises. Overall, personal income increased about 1 percent to $133.2 billion. Overall, that equals about $428 per person in increased spending power in the United States. Increased costs of fuel, food and housing mean that disposable income increased by less — about 0.7 percent. Some figures put the increase in “real” disposable income at even less — about 0.4 percent.

Smaller increases in personal spending

While personal income did go up during the month of January, personal spending did not go up at the same rate. Overall consumer spending in the United States went up by about 0.2 percent. The remaining increase in personal income was put in savings. As a whole, Americans saved about $677.1 billion in January of 2011. This puts the personal savings rate at more than the increase in personal income. This higher savings rate indicates that consumers are being much more cautious with their money. The decreased tax burden does not necessarily translate to spending, as the taxes are showing up in small amounts in paychecks, rather than as a lump-sum payment.

What the numbers mean

Economists put heavy stock in the spending and saving rates reported month-by-month. Rarely are the estimations of monthly income, savings and spending economists offer entirely correct. The real importance in these numbers could be the changing attitude of the American consumer. For several years before the economic collapse, Americans were spending more money than they had. The increased savings rate technically will slow down overall economic recovery because it means less money is going into the economy. For long-term recovery, however, a high savings rate means that individuals have a reduced need for credit and high-risk financial products. This reduced demand means the U.S. financial system could develop a more stable base and weather future downturns more easily.


CNN Money

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