Economy Watch: Personal Income Drops

By Dees Stribling, Contributing Editor

The Bureau of Economic Analysis reported on Friday that U.S. personal income took a hit in January. At $505.5 billion, income was down 3.6 percent for the month, the largest drop in about 20 years. But accounting maneuvers spurred the drop more than a wider decline in economic activity, since some income that would ordinarily have been taken in January was shifted in December, to avoid higher taxes.

At the same time, total spending—what the BEA called personal consumption expenditures—was up a little, by 0.2 percent for the month. Some of that, however, was because of rising prices, such as for gasoline, which has been volatile on the upward side lately.

When income is down yet spending is up, people tend not be saving as much. Sure enough, the BEA also reported that personal saving—disposable personal income minus personal outlays—was $283.9 billion in January, compared with $797.4 billion in December. The personal saving rate, which is saving as a percentage of disposable personal income, was 2.4 percent in January, compared with 6.4 percent in December.

Construction spending also down

Construction spending was down in January compared with December, according to the Census Bureau on Friday, which put it at an annualized rate of $883.3 billion. That’s 2.1 percent below the revised December rate of $902.6 billion, but 7.1 percent higher than the January 2012 rate.

Both private and public construction spending dropped month-over-month. Spending on private construction was down 2.6 percent, mostly because of a drop in power and electric projects. Private residential construction, on the other hand, came in at an annualize rate of $304.6 billion in January, nearly the same as the revised December rate of $304.7 billion.

In January the annualized rate of public construction spending was $269 billion, 1 percent below the December rate. Public spending is down 3 percent year-over-year, and in fact is at its lowest level since 2006. Considering that federal stimulus spending has largely run its course, and that the sequester might drag on for a while, it’s unlikely that going forward public construction’s going to be anything but a drag on total construction spending.

The sequester has arrived

Friday was Sequester Day. Not much happened, since most of Congress was out of town and negotiations between the president and the Congressional leaders who were in town were inconclusive. At some point during the day, however, the administration was obliged to notify various government agencies that their funding is being cut.

The cuts aren’t that large in terms of the vast $3.5 trillion federal budget, but there will be an immediate impact on most agencies (cutting distributions to the states, prompting furloughs for some employees, and the like). The wider effect will take weeks or months to be felt. While much guesswork has been aired about how the sequester will affect the economy, the sober-minded Congressional Budget Office has estimated that it would halve U.S. economic growth in 2013 to 1.4 percent.

Wall Street didn’t seem to mind the sequester much on Friday, with the Dow Jones Industrial Average up 35.17 points, or 0.25 percent. The S&P 500 gained 0.23 percent and the Nasdaq advanced 0.3 percent.