Spending Lags Income Growth, Casting Doubt on a Slowdown : Economy: Analysts see nothing in latest numbers to deter the Fed from raising interest rates once again.
Americans’ income is growing faster than spending, leaving analysts to wonder how soon an anticipated economic slowdown will materialize.
The Commerce Department reported Monday that personal income rose a healthy 0.8% in December to $5.89 trillion, after a rare drop the month before. Earnings for all of 1994 were up 6.1%, the biggest gain in four years.
Meanwhile, spending climbed 0.3% to $4.75 trillion last month. It rose 5.7% for the entire year, compared to a 5.8% increase in 1993, and was the smallest advance since a 3.8% rise in 1991.
Analysts said the report offered scant evidence of an expected slowdown in the economy early in 1995 and is unlikely to deter the Federal Reserve from raising interest rates this week for a seventh time in the past year.
“Based on what I see, I’m not sure there’s any convincing evidence of the economy slowing,” said economist Sung Won Sohn of Norwest Corp. in Minneapolis.
“I would want to see a slowdown in income and spending first,” Sohn added, but he said he expects the Labor Department to announce on Friday that another 250,000 jobs were created in January on top of 256,000 in December.
But others said they see signs that the rate of growth is slowing, and that interest rate increases soon will begin to have a bigger effect on consumer spending.
There are “hints that consumers have turned more cautious in spending on big-ticket” items, said economist David Jones of Aubrey G. Lanston & Co., a government securities dealer in New York City. “It looks like consumers have tightened up their purse strings with regard to spending on autos.”
Consumer spending represents two-thirds of the nation’s economic activity and has propelled the economy’s 4-year-old recovery.
The government reported last week that the economy surged 4.5% in the last three months of 1994 and grew 4% for the year, the strongest growth in a decade.
Analysts predict the Federal Reserve, seeking to restrain growth and check inflation, will boost interest rates for the seventh time in a year during a two-day meeting beginning today. Monday’s income figures compare favorably to inflation, rising more than twice as rapidly as the 2.7% increase in the consumer price index last year.
The Commerce Department also said that disposable income--income after taxes--climbed 0.8% in December.
Income fell 0.1% in November, only the second time it declined last year. Spending in November rose 0.4%, revised down from a 0.6% earlier estimate.
The combination of income and spending meant that Americans’ savings rate--savings as a percentage of disposable income--climbed to 4.8% in December, from 4.3% the previous month. The savings rate was the highest since October, when it also was up 4.8%.
Boosted by year-end bonuses for auto workers, private wages and salaries increased at a $19.8-billion annual rate in December compared to a $3.3-billion decline in November.
Spending on long-lasting items such as cars and appliances rose 1.1% in December to a seasonally adjusted annual rate of $621.1 billion. Spending on non-durable goods, such as food and fuel, was up less than 0.1% to $1.421 trillion, and spending on services rose 0.3% to $2.703 trillion.
The income and spending figures were not adjusted for inflation. When adjusted, disposable income rose 0.7% in December, while spending was up 0.2%.
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Personal Income
Seasonally adjusted annual rate, in trillions of dollars:
Dec. 1994: $5.89
Source: Commerce Department
