Consumer Spending Beats Estimates, Personal Income Does Not

The trend of mixed news for investors continued today, as the Commerce Department reported that consumer spending increased by 0.5 percent in January, while personal income increased 0.1 percent.  Much of the disappointing results in personal income was due to a decline in dividend and interest income, which offset a better than expected increase in wages and salaries.  Naturally, since spending increased more rapidly than incomes, that meant that the savings rate declined.  Savings fell to 3.3 percent from December's 4.2 percent.

The increase in consumer spending came in better than the consensus estimate of 0.4 percent, with estimates ranging from an increase of 0.2 percent to an increase of 0.6 percent.  Economists had expected personal incomes to grow by 0.4 percent, thus expecting expenditures and income to increase at the same rate.

The increase in consumer spending was the fourth straight increase and the increase in personal income was the sixth consecutive increase.

Analysts said that the increase in spending was a good sign, especially given the challenges consumers face with unemployment still running high.  "It's a good start," said the chief financial economist for IHS Global Insight, who correctly forecast the consumer spending number.  However, he cautioned against reading too much into the results, saying "consumption is not going to be the driver" for the economy.

Retailers concurred, saying that while they expect to see increased revenues this year, they do not expect a robust recovery in consumer spending due to concerns over jobs and the housing market.  As the CEO of Home Depot said, "we recognize that we have more work to do as a company and that the economy is not out of the woods yet, particularly in our market, so we're not projecting robust growth."

Still, the growth in consumer spending is good news.  While it's difficult to see how spending can grow strongly given constrained credit as well as concerns over housing and jobs, there needs to be at least mediocre growth in order for the economy to do well.