The government released several economic reports this past week, including a revision of fourth quarter GDP and personal income/spending for January. The headline numbers show that, instead of shrinking by 0.1% in the fourth quarter, the economy grew by 0.1%. Personal income declined by 3.6% in January, the worst month in 20 years, after rising by 2.6% in December. What did we learn from these reports? Not too much.
The GDP report contained minor revisions and still reflect an economy that is growing at a modest rate (the private sector continues to grow at close to a 2% rate, which is better than 0%, but nothing to brag about).
The personal income/spending report reflects the impact of the anticipation and reality of the tax changes. Those who could shifted income into December 2012 to avoid the anticipated tax hikes, resulting in a surge in dividends and bonuses in December and a subsquent decline in January. When was the last time the US saw such a shifting in income? In the early 1990s after the election of President Clinton, who promised to increase taxes on the rich during the 1992 campaign; the result was a surge in income in December 1992 to avoid the higher taxes and decline in January 1993 (so that's why this January was the largest decline in 20 years).
More importantly, consumer spending, adjusted for inflation rose by 0.1% in both December and January, reflecting a slowdown from the Fall of 2012. The savings rate, which rose in December due to the temporary surge in income, declined to 2.4% in January, the lowest since November 2007 (right before the start of the recession). Given the conisderable noise in the data, it's important to watch how things unfold in the coming months.
What are the key takeaways? The economy was sluggish as 2012 came to an end and consumer spending continues to move forward, but at a slow rate. It's still a little too early to tell how much of a hit consumer spending will take from the payroll tax hike. Early evidence indicates that low and moderate income consumers are struggling, which should contribute to a sluggish economy in the first half of 2013. Though not part of this post, it should be noted that housing is now the strongest part of the US economy (growing at a double-digit rate over the last year), helping to offset weakness in consumer spending and reductions in government spending.
