The Commerce Department report Friday was a bit of a jolt on first reading, but the biggest indicators of how consumers are dealing with the end of the 2 percent payroll tax cut will likely come next month in the report for February.
The sharp decline in personal income in January marked the largest drop since January 1993. Part of the decline was a pullback from a 2.6 percent surge in December, as businesses rushed to pay out dividends and bonuses before the new year’s hike in taxes.
A portion of the drop in January also reflected the tax increases. The income at the disposal of households after inflation and taxes plunged 4 percent in January, after advancing 2.7 percent in December.
Consumer spending January rose 0.2 percent after a revised 0.1 percent rise the prior month. January’s increase was in line with economists’ expectations.
Though spending increased in January, it was supported by a rise in services, probably related to utilities consumption.
Spending on goods dropped, suggesting an impact from the expiration at the end of 2012 of the payroll tax cut, which reduced most Americans’ take-home pay beginning with the new year. Tax rates for wealthier Americans also increased.
The impact of the lighter paychecks are expected to be larger in February’s spending data, and possibly throughout the first half of the year. Households are also burdened with rising gasoline prices.