Economy Watch: Consumer Spending Up, but Not as Much as Incomes

Incomes were up in January, with help from the cut in Social Security taxes; pending home sales dipped; and the NABE predicts better GDP growth a previous projection.

By Dees Stribling, Contributing Editor

Incomes were up in January, mainly because of the cut in Social Security taxes approved in December, but consumer spending didn’t quite match, according to the U.S. Department of Commerce on Monday. Incomes were up 1 percent, the largest increase in about two years, while consumer spending inched up only 0.2 percent.

But it’s early in the game yet for this back-door stimulus. The tax cut will mean that roughly $110 billion will be available for consumer spending over the course of 2011, which works out to $1,000 to $2,000 per household or so for most people, and even more for high-income households.

The question now is what consumers will spend that windfall on as the year unfolds. The positive scenario would be goods and services that, through a multiplier effect, stimulate businesses to hire more workers. The negative scenario is that the $1,000 to $2,000 will be eaten up by increases in the price of gas and other items that aren’t part of core inflation.

Pending homes sales dip

The National Association of Realtors said on Monday that its Pending Home Sales Index dropped 2.8 percent in January when compared with December. Compared with the same month a year ago, the index was off 1.54 percent. The index is a forward-looking indicator based on residential sales contracts inked but not finalized.

The pace of January existing-home sales, 5.36 million, is slightly higher than NAR’s annual forecast for 2011. If contract activity stays on its present course, the association posits, there should be an 8 percent increase in total existing-home sales in 2011 compared with 2010.

Lawrence Yun, ever the optimist, puts the best face possible on the situation. “While homebuyers over the past two years have been exceptionally successful with historically low default rates, there is still an elevated level of shadow inventory of distressed homes from past lending mistakes that need to go through the system,” he says in a statement. “We should not expect the recovery to be in a straight upward path–it will zig-zag at times.”

NABE feeling more optimistic than before

Remarkably, there are still economic optimists out there besides Warren Buffett and Lawrence Yun. On Monday, the National Association for Business Economics, which publishes an assessment of the U.S. economy on a quarterly basis, revised its earlier growth projections. Now the organization is predicting that U.S. GDP will advance 3.3 percent year-over-year in 2011, up from a prediction of 2.6 percent in November.

“Factors supporting growth going forward include pent-up consumer and business demand, strong growth in foreign economies, especially those in Asia, and accommodative monetary policy,” NABE President Richard Wobbekind, associate dean of the Leeds School of Business at the University of Colorado, says in a statement that adds a few caveats. “[We] remain confident about the expansion’s durability, but are concerned about high levels of government deficits and debt, excessive unemployment, and rising commodity prices.”

Wall Street had a mixed day on Monday, with the Dow Jones Industrial Average ending in positive territory, up 87.56 points, or 0.72 percent. The S&P 500 was up 0.47 percent, but the Nasdaq dropped 0.12 percent.

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