As expected, the government reported a dramatic drop in personal income in January, with that metric, which had soared by 2.6% in December, plunging by an even more outsized 3.6% for the latest reported month. This was the largest drop in personal income since January of 1993.
Now, a sharp retreat in this metric had been expected, largely because of the end of the payroll tax withholding holiday, as social security taxes rose from 4.2% of a wage earner's income to 6.2%. (The percentage paid by self-employed individuals is materially greater, meantime.) Also weighing on this figure was the decision by many companies to pay their first-quarter dividends in late 2012, so that stockholders would be taxed at a lower rate than will prevail in 2013. Further, some individuals receiving bonus payments had such disbursements moved up into late 2012, as well.
Still, the sharp reversal was materially greater than the 2.2% drop that had been expected. At the same time, the corresponding data on personal consumption expenditures came in at an unprepossessing increase of 0.1% for January, the same gain as in December. In November, spending had jumped by 0.5%. Clearly, the consumer, buffeted by the lower incomes, is holding back on spending at this time.
Taking the report apart, we find that wages and salaries, not surprisingly, fell by 0.6% in January, after gaining 0.7% and 1.1%, respectively, during December and November. Disposable income, meantime, tumbled by 4.0% in the first month of this year, more than reversing a 2.7% gain in the final month of 2012.
As for spending in January, Americans doled out fewer dollars on durables that month, but spent more on nondurables and services.
All in all, this was a somewhat disquieting report, but one that was not unexpected. Personal income should resume a more orderly progression over the coming months. As to spending, one would assume all things being equal, that in a modestly expanding economy, such outlays would be expected to increase. However, there are some concerns now that the so-called sequestrations, or mandatory budget cuts, have gone into effect today will depress spending. How long and to what degree the cuts will evolve are yet to be determined, but it is likely that some penalties will be exacted, and that could distort the pending figures somewhat going forward this year.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.