Income flat, but wallets open

WASHINGTON - Americans increased their spending at a solid pace for the second straight month in December even though their income was flat.

Consumer spending rose 0.4 percent in December, compared with November when spending had increased an even stronger 0.6 percent, the Commerce Department reported Friday. That was the best gain in five months.

Income, however, showed no gain at all in December after a 0.2 percent rise in November. Wages and salaries were basically flat last month, reflecting a sharp slowing in employment growth.

For all of 2013, income growth was 2.8 percent, the weakest performance since 2009 when income fell 2.8 percent as the country struggled with a deep recession.

Economists are hoping that stronger economic growth will promote stronger employment and income gains this year.

Chris G. Christopher, director of consumer economics at Global Insight, said that he was looking for stronger growth in consumer spending this year, reflecting improvements in the housing market, job prospects and consumer confidence.

While consumer confidence has been rising, the University of Michigan index of consumer sentiment released Friday showed a slight drop in January to 81.2 compared to December reading of 82.5, a decline attributed in part to recent setbacks in the stock market.

The combination of stronger spending in December but no improvement in income meant that consumers tapped savings to finance their spending. The saving rate slipped to 3.9 percent of after-tax income in December, down from 4.3 percent in November. It was the lowest monthly saving rate since it dropped to 3.6 percent last January.

For the year, the saving rate slipped 4.5 percent, the lowest level since the rate was 3 percent in 2007. The saving rate had fallen before the recession as surging home prices made Americans feel wealthier and more willing to spend more and save less. However, once the recession took hold and millions of Americans lost their jobs while home prices plunged, Americans became more frugal and the saving rate rose, peaking at 6.1 percent in 2009 and remaining above 5 percent for the next three years.

Consumer spending is closely watched because it accounts for 70 percent of economic activity.

For the October-December quarter, consumer spending was rising at the fastest pace in three years, giving economists hope that the economy has finally turned the corner to faster growth after a prolonged period of sub-par activity since the recession ended in June 2009.

Consumers have been buying durable goods such as cars as well as non-durable products such as clothing.

While the overall economy grew just 1.9 percent in 2013, some analysts think growth could accelerate to around 3 percent this year. If it does, 2014 would be the best year for growth since the recession ended.

This year, economists think the U.S. economy will get a lift from continued gains in hiring. Further steady job growth would give more households money to spend and help increase consumer spending.

In addition, U.S. manufacturers are expected to gain from rising global demand. And housing construction and auto sales are expected to strengthen further in 2014.

Stronger growth and the improving job market are the primary reasons the Federal Reserve is pressing ahead with a plan to scale back its economic stimulus.

Most forecasters think the economy will manage to withstand such factors as turmoil in emerging economies, which have been rattled by the pullback in the Fed's stimulus and the prospect of higher U.S. interest rates.

One major reason for optimism: A belief that the government will be less of a drag than in 2013, when higher federal taxes and spending cuts trimmed overall growth by an estimated 1.5 percentage points.

A budget deal Congress approved earlier this month halted tens of billions in additional spending cuts that were due to kick in this year.

Many global investors are concerned that the Fed's pullback in its bond purchases will raise U.S. interest rates and cause investors to shift money out of emerging markets and into the United States for higher returns. Currency values in emerging economies have fallen over that concern.

Many analysts think the Fed will keep paring its support at each of its meetings this year until it eliminates new bond purchases entirely in December. In making the announcement Wednesday of another $10 billion reduction in bond purchases, the Fed cited an improving economy, including more strength in consumer and business spending.

However, some Fed officials have expressed concerns about withdrawing economic support while prices are rising at such a sluggish rate. While high inflation can be a problem, the Fed also worries if prices are rising too slowly, a development that raises the prospect of deflation. That can also do serious harm to an economy.

For December, prices measured by an inflation gauge tied to consumer spending rose a modest 0.2 percent, compared with November, and were up just 1.1 percent for the entire year, well below the Fed's 2 percent inflation target.