Consumers Spending More, Saving Less

While income levels for U.S. citizens dropped by the largest amount in 20 years, consumer spending in January rose, signifying households are spending more and saving less. According to the Commerce Department, spending in January increased by 0.2 percent, a figure in line with what economists predicted for the beginning of 2013. 

The rise in spending was mainly due to increased spending on services, as spending on goods decreased. Economists attribute this to heightened utility consumption as consumers reduced spending on goods to counteract high payroll taxes. Consumption rates are expected to decrease throughout the first quarter as Americans adjust to living off smaller paychecks.

According to Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania: “It's going to be touch and go for the consumer for the next few months. The consumer is going to be able to support the recovery, but they're not going to be able to take it [higher].” 

“We expect a significant decrease in real consumer spending in the first half of the year,” said Yelena Shulyatyeva, US economist at BNP Paribas, New York. “We are looking for a very subdued Q1 reading, and that’s the effect from the fiscal tightening. That will weigh significantly on first-quarter GDP, which we expect at 1.2 per cent.”

Americans are now facing a 3.6 percent dive in income, the largest fall since January 1993, which is certainly taking its toll on households. To compensate, many people are putting less money away each month in savings. The saving rate fell 2.4 percent in January, the lowest it's been since November 2007.

But despite these setbacks, manufacturing expanded at the highest level since June 2011 in February with the Institute for Supply Management's factory index at 54.2, a figure exceeding even the most optimistic forecasts from a Bloomberg survey.

From Bloomberg:

“Orders expanded the most in almost two years, the report showed, as manufacturers such as Applied Materials Inc. (AMAT) emerged from an industry setback in the second half of 2012. The production gains complement a rebound in the housing market and help underpin the economy amid budget disputes in Washington.”

The increase activity is due to investment in new equipment such as those needed in mobile devices. Consumer demand for motor vehicles has also contributed to increased manufacturing, despite the rise in gas prices. November through January represent the strongest three months for the auto industry in the past five years.

Reports from two Chinese manufacturing indexes also show that manufacturing in China is expanding at a slower-than estimated pace while rates across Europe fluctuate.