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Americans' spending outpaced their incomes in an unusually warm month

Updated: 11:32 a.m. ET March 1, 2006

WASHINGTON - Consumers, lured out to the stores by the warmest January in
more than a century, spent at a rapid clip that outpaced their incomes.

That meant that their savings rate started the year where it finished 2005,
a year which saw a negative savings rate for the first time since the Great
Depression.
The Commerce Department
reported Wednesday that personal spending shot up by 0.9 percent, the
strongest gain in six months. Incomes rose by a solid 0.7 percent, the best
showing since September, with the gains attributed to a variety of factors
including cost-of-living adjustments for Social Security benefits and the
new prescription drug benefit for Medicare recipients.

The bigger rise in spending compared to incomes kept the personal savings
rate in negative territory at 0.7 percent in January. That meant Americans
spent more than their after-tax incomes, meaning they had to dip into prior
savings or increase their borrowing. For all of 2005, the savings rate
registered a negative 0.4 percent, the first time the savings rate has been
in negative territory for an entire year since the Depression years of 1932
and 1933.

Economists say that this is exactly the wrong time for the savings rate to
dip into negative territory with the impending retirement of 78 million baby
boomers.

Part of the reason for the dip is that Americans who own homes felt more
wealthy in recent years given the huge increases in home values. That
spurred them to spend more of their paychecks since their net worth was
increasing with their rising home values.

However, the Federal Reserve reported last week that even with the rise in
home values, Americans' net worth rose over the past three years at the
slowest pace in more than a decade, reflecting in part reduced investments
in the stock market since the bursting of the Internet stock bubble at the
beginning of the decade.

The 0.7 percent rise in incomes in January followed a 0.5 percent December
increase. It was the largest gain since a 3.1 percent surge in September
that reflected the way the government accounted for insurance payments
following Hurricane Katrina.

The January increase was bolstered by a number of special factors including
a cost-of-living increase for Social Security beneficiaries, the start of
the new Medicare drug payment plan and pay raises for federal workers.
Without the various special factors, personal income would have risen a
smaller 0.4 percent in January.

The 0.9 percent rise in consumer spending followed a strong 0.7 percent
increase in December and was the biggest gain since a 1.4 percent surge last
July, a month when consumers flocked to auto showrooms to take advantage of
extremely attractive incentive offers.

January sales were bolstered by the warm weather, which lured shoppers to
the malls, and by a rebound in auto sales.

Disposable income, the amount left after paying taxes, rose by 0.5 percent
last month. The personal savings rate, the amount left after subtracting
spending from disposable incomes, dipped to a negative 0.7 percent in
January compared to a negative 0.4 percent in December.

An inflation gauge closely watched by the Federal Reserve showed that prices
excluding energy and food rose by 1.8 percent for the 12 months ending in
January, a slight improvement from a 1.9 percent increase for the 12 months
ending in December.

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