US Personal Income Posts Biggest Drop In 20 Years; Personal Spending Edges Up

By Moran Zhang | March 01 2013 9:27 AM

Personal income growth in the U.S. plunged 3.6 percent in January, the Commerce Department said on Friday. That was the biggest one-month drop since January 1993 and larger than the 2.1 percent fall economists had expected.

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Americans spent their hard-earned money a bit more freely in February, the most in seven months, even as income rose only modestly, according to government data released Friday.

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But households absorbed the loss by lowering their saving rather than their spending. Consumer spending increased 0.2 percent in January after a revised 0.1 percent rise in the prior month.

According to Paul Dales of Capital Economics, 2.6 percentage points of the drop in personal income was due to a one-off 34.8 percent fall in dividend income. This followed a 32.8 percent rise in December as, ahead of potential tax hikes at the start of the year, firms moved payouts from 2013 to 2012. Most of the remainder of the decline was due to January’s hike in payroll taxes.

“The rise in marginal tax rates for high-income earners raised tax payments, which meant that both nominal and real disposable income fell by a larger 4 percent,” Dales said. “Households responded to this hit to income by reducing their savings.”

The saving rate fell to 2.4 percent from 6.4 percent. That more than reversed the rise from 4 percent in December when the extra dividend payouts were saved.