Taxes squeeze U.S. households, factories to add growth
By Lucia Mutikani
WASHINGTON (Reuters) - U.S. consumer spending was tepid in January as higher taxes squeezed household incomes, but vigor in the manufacturing sector last month suggested economic growth picked up this quarter after stalling in late 2012.
Other data on Friday showed consumer sentiment rose last month, which should help to support spending. Still, there is not enough momentum in the economy to shift the Federal Reserve way from its very accommodative monetary policy path.
The Commerce Department said consumer spending increased 0.2 percent in January as Americans spent more on utilities after a cold snap during the month. January's rise was in line with expectations and followed a 0.1 percent gain in December.
Consumer spending accounts for about 70 percent of U.S. economic activity and when adjusted for inflation, it gained 0.1 percent after a similar increase in December.
"The weak tone in real consumer spending activity underscores the relatively soft economic growth momentum at the start of the year as the impact from fiscal austerity begins to temper the recovery," said Millan Mulraine, a senior economist at TD Securities in New York.
A separate report showed the Institute for Supply Management's index of national factory activity rose to 54.2 in February on strong orders growth. It was the highest level since June 2011 and followed as reading of 53.1 in January.
A reading above 50 indicates expansion in manufacturing. The report suggested manufacturing will continue to support growth, a welcome sign as consumer spending is expected to pull back sharply this quarter as households feel the pinch from higher taxes.
Stocks on Wall Street trimmed losses on the factory and consumer sentiment data, while U.S. Treasury debt prices pared gains. The dollar rose against the euro and the yen.
The expiration at the end of 2012 of a 2 percent payroll tax cut and the increase in tax rates for wealthy Americans, depressed spending on goods in January.
The impact is expected to be larger in February's spending data and possibly extend through the first half of the year as households adjust to smaller paychecks, which are also being strained by rising gasoline prices.
Economists expect consumer spending to slow down sharply from the fourth quarter's 2.1 percent annual pace and restrain growth. The economy expanded at an only 0.1 percent rate in the final three months of 2012.
SUBDUED CONSUMER SPENDING
"We are looking for a very subdued first-quarter reading, and that's the effect from the fiscal tightening. That will weigh significantly on first-quarter GDP, which we expect at 1.2 percent," said Yelena Shulyatyeva, U.S. economist at BNP Paribas in New York.
But there is reason to be cautiously optimistic. The Thomson Reuters/University of Michigan's consumer sentiment index rose to 77.6 in February from 73.8 in January, amid optimism over jobs.
Steady job growth should help, given that income tumbled 3.6 percent in January, the largest drop since January 1993.
However, part of the decline was payback for a 2.6 percent surge in December as businesses, anxious about higher taxes, rushed to pay dividends and bonuses before the new year.
Taking into account the higher taxes that went into effect at the start of the year, the squeeze on households was even greater. The income at the disposal of households after inflation and taxes plunged a 4.0 percent in January after advancing 2.7 percent in December.
Excluding the unwinding of the dividend and bonus boost, disposable income increased 0.3 percent in January.
With income dropping sharply and spending rising modestly, the saving rate - the percentage of disposable income households are socking away - fell to 2.4 percent, the lowest level since November 2007. The rate had jumped to 6.4 percent in December.
Savings were the smallest since December 2007.
Inflation was largely contained, even though gasoline prices pushed higher. A price index for consumer spending was flat for a second straight month.
That left its increase over the past 12 months at 1.2 percent, the smallest since October 2009. It increased 1.4 percent in December.
So-called core prices, which strip out food and energy costs, edged up 0.1 percent after being flat the prior month. The year-on-year gain was 1.3 percent, the smallest since April 2011 and well below the Fed's 2 percent target.
The U.S. central bank last year embarked on an open-ended bond buying program and said it would keep it up until it saw a substantial improvement in the outlook for the labor market. It hopes the purchases will drive down borrowing costs.
Weak growth and benign inflation could compel the Fed to maintain its very easy monetary policy stance.
"From the Fed's perspective the poor performance in real spending activity will continue to augur for more policy accommodation as they try to provide a monetary offset for the expected fiscal drag, which should accelerate in the second quarter," said Mulraine.
(Additional reporting by Richard Leong and Leah Schnurr in New York; Editing by Andrea Ricci)
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