Consumer income up, rising prices take bite out of personal saving rates

By April Dykman

U.S. spending and personal income ended on a positive note in the first quarter 2011, especially in light of soaring gas prices, according to data just released by the Commerce Department.

Spending increased 0.6 percent in current dollar terms, but savings accounts continued to take a hit. While personal income increased 0.5 percent, personal disposable income increased only 0.1 percent and the personal saving rate remained at 5.5 percent, off from 5.9 percent in January.

This means that while average income increased and households continued to spend through the end of March, rising prices took a bite out of spending power and left less on the table for household savings accounts.

Stimulus spending and economic growth

The Commerce Department released its report on personal incomes and consumer spending on April 28. Its initial forecast said economic growth slowed to a 1.8 percent annual pace in the first quarter of 2011 from the 3.1 percent pace in the last quarter of 2010.

According to MarketWatch, the main reason economic growth slowed in the first quarter of this year can be attributed to a major decrease in government spending. However, consumer spending also slowed to a 2.7 percent pace from a 4 percent pace in the last quarter of 2010. Consumer spending makes up approximately 70 percent of the economy.

Personal spending and savings rates

The Commerce Department released revised consumer spending data for January and February. Spending increased by 0.5 percent in January (revised from the 0.3 percent estimate) and by 0.9 percent in February (revised from 0.7 percent estimate).

Personal spending continued to reflect the biggest gains since December 2009. Real spending on services was up 0.4 percent.

Real personal consumption spending on durable goods increased 0.1 percent; real spending on non-durable goods dropped 0.3 percent. Durable goods are items which can be used for several years, such as cars and machinery. Non-durable goods are items which are used or consumed relatively quickly, such as gasoline and tires.

Data showed that in March personal income increased more than the predicted 0.3 percent at 0.5 percent. Wages and salaries were up 0.3 percent, following a 0.4 percent increase in February. Savings accounts didn't see much action, though. As spending increases were higher in the first quarter than income increases, the national personal savings rate went down to 5.5 percent in March, equal with February's rate and down from January's 5.9 percent rate.

Inflation and spending

The personal consumption expenditure (PCE) index was up 0.4 percent in March. According to Federal Reserve officials, the PCE index is a more accurate measure of inflation than the consumer price index. Over the last year, the PCE price index was up 1.8 percent, while the core PCE index rose 0.9 percent.

Adjusted for inflation of 0.4 percent, after-tax incomes increased 0.1 percent in March and consumer spending was up 0.2 percent. The core rate of inflation, which excludes food and energy prices, increased 0.1 percent.


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