U.S. consumer spending rose less than expected in January as households took advantage of the largest increase in incomes in more than 1-1/2 years to rebuild their savings, government data showed on Monday.
The Commerce Department said spending edged up 0.2 percent, the smallest increase in seven months, after an upwardly revised 0.5 percent rise in December. It was still the seventh straight month of gains.
Economists polled by Reuters had expected spending, which accounts for about 70 percent of U.S. economic activity, to rise 0.4 percent in January.
Real spending fell 0.1 percent, the first decline in a year, after rising 0.3 percent in December. The drop in real spending offered an early confirmation that spending would slow down after rising sharply in the last three months of 2010.
Incomes rose 1.0 percent last month, the largest increase since May 2009, after increasing 0.4 percent in December. The increase in January outpaced economists' expectations for a 0.4 percent gain.
Savings jumped to $677.1 billion, the highest level since August, from $620.9 billion in December.
The report also showed the Federal Reserve's preferred measure of consumer inflation -- the personal consumption expenditures price index, excluding food and energy - edged up 0.1 percent last month, after being unchanged in December.
In the 12 months through January, the core PCE index rose 0.8 percent after rising by the same margin in December.
ANALYSISTS COMMENTS: SEAN INCREMONA, ECONOMIST, 4CAST LTD, NEW YORK
Spending was soft, we expected that after the soft January retail sales report. Income was surprisingly very strong, there was probably some sort of flattering effects from payroll or tax cuts or some sort of affect from the changeover from the new year.
On net it really doesn't change much, spending will probably continue to be resilient, stronger than this number going forward as January was affected by being post holidays and with the weather being a factor there. It doesn't look like these numbers are going to change the outlook at all.
DAVID SLOAN, ECONOMIST, IFR, THOMSON REUTERS
January personal income saw a sharp 1.0 pct increase in a release that was lifted by reduction in employee social security contributions. This was the main reason income outpaced a subdued 0.2 pct rise in personal spending, with the breakdown otherwise looking subdued, particularly in real terms.
Special factors regarding tax changes came not only from the reduction in social security contributions. There was also the expiry of a making work pay tax credit, part of the earlier fiscal stimulus.
Confusion may arise in that the payroll tax holiday boosted the overall personal income data while the making work pay expiry impacted only disposable income, which rose by 0.7 pct, less than the overall personal income rise.
Many forecasters mistakenly expected the payroll tax holiday to be relevant only for disposable (or after tax) income.
Excluding both special factors, disposable income rose by only 0.1 pct. Wages and salaries rose by 0.3 pct but there was a negative from government transfer receipts, on a decrease in the earned income tax credit. Real disposable income increased by 0.4 pct in January.
With the PCE price index up by 0.3%, led by gasoline, it can be seen that there was little growth in real disposable income even with the support from the payroll tax holiday, and with gasoline prices likely to restrain future growth in real disposable income there must be some questions on whether the strong Q4 growth in personal spending can be sustained, even with the strong nominal overall personal income headline.
In January personal spending grew by a modest 0.2 pct and fell by 0.1 pct in real terms, with non-durables and service consumption declining in real terms. Still, January's data was restrained by bad weather, and a rise in the savings rate to 5.8 pct from 5.4 0 pct gives some rebound potential to February spending.
Core PCE prices rose by 0.1 pct, and by 0.123 pct before rounding. The year/year rate remained at a very low 0.8 pct but this may prove to be a bottom.