If you're feeling a bit more flush than you did last month, that's because of the income boost felt nationwide. The average American income rose about 1 percent last month -- the largest leap it's taken in almost two years, according to the United States Department of Commerce.
"Personal income surged in January, largely as a result of the Middle Class Tax Relief Act that the president signed in December," said U.S. Commerce Department Chief Economist Mark Doms. "By lowering employee contributions for Social Security, workers have more take-home pay. This increased spending capacity should boost the U.S. economy and employment in 2011."
So your income boost didn't come from employers feeling more generous. It's because you're enjoying the Social Security tax cut that just went into effect. It gives the average American family about $1,000 extra to spend this year -- less than $100 per month.
You'd think that consumer spending would rise in proportion to that, but apparently, that's not the case. Consumer spending increased only 0.2 percent in January, which is the tiniest uptick since June, according to Commerce Department numbers. Some analysts believe this small increase can be blamed on the weather -- Americans just couldn't get out to spend the extra cash.
But other experts believe Americans are making more of an effort to sock it away. The personal savings rate rose in January to 5.8 percent of after-tax incomes, more than the 5.4 percent we collectively saved in December. Consider the fact that we were saving a mere 2.1 percent of our salaries in 2007, when were buying everything on credit, our confidence surging as our homes values increased.
While saving can be good for the individual, it's not so great for the job market. Increased spending often translates to more jobs, since it creates more demand for goods produced. Consumer spending accounts for about 70 percent of all economic activity in the United States.
American consumer spending did increase on durable goods, such as new cars, in January. We also spent more on non-durable goods, such as food and gasoline, because we had to, with prices rising so rapidly. The recent gas price surges are also shaking our confidence and encouraging us to save more for the proverbial rainy day, which now seems immnent.
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