Washington: US consumers increased their spending in December at a slower pace, while their income grew by the largest amount in eight years. Income surged because companies rushed to pay dividends before income taxes increased on high earners.
The Commerce Department said Thursday that consumer spending rose 0.2 per cent last month. That’s slightly slower than the 0.4 per cent increase in November.
Income jumped 2.6 per cent in December from November. Companies accelerated dividend payments to beat the January rise in income tax rates. It was the biggest gain since December 2004.
Consumer spending, which accounts for about 70 per cent of economic activity, is expected to slow this year. That’s because consumers are receiving less take-home pay starting this month.
The Congress and White House reached a deal on January 1 to prevent income taxes from rising on all but the wealthiest Americans. But they allowed a temporary reduction in Social Security taxes to expire this year. That means a person earning $50,000 (Dh183,650) a year will have about $1,000 less to spend in 2013. A household with two high-paid workers will have up to $4,500 less.
The diminished pay could slow consumer spending and economic growth at a precarious moment.
The economy unexpectedly shrank in the October-December period at an annual rate of 0.1 per cent, Commerce said Wednesday. The dip was a reminder of the economy’s vulnerability as automatic cuts in government spending loom.
Some analysts have estimated that the roughly $120 billion in higher Social Security taxes could subtract up to 0.7 percentage point from growth this year.
And other policy decisions in Washington could slow growth further.
The agreement on the fiscal cliff averted income tax cuts on most consumers. But it only delayed across-the-board government spending cuts for two months. The cuts are set to take effect on March 1 if no agreement is reached to avert them.
The Federal Reserve announced Wednesday that it was keeping all its aggressive stimulus programs in place. These include $85 billion a month in bond purchases. The purchases are intended to keep long-term interest rates down to encourage spending, boost growth and reduce still-high unemployment.
The Fed also left its target for short-term rates at a record low and said it would stay there at least until unemployment, now at 7.8 per cent, stays above 6.5 per cent. Many economists think unemployment remained at 7.8 percent in January.
The January jobs report will be released Friday.