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Income and Spending Drop in January : Analysts Say Special Factors Skew Figures

February 22, 1986|Associated Press

WASHINGTON — Americans' personal income fell for the first time in eight months and consumer spending dropped by 0.4% in January, the Commerce Department reported Friday.

But analysts discounted the weak numbers, saying the declines were skewed by a host of special factors including new Social Security taxes, a big swing in farm subsidy payments and even soggy weather.

The government said the 0.1% decline in personal income was the first setback since a 0.5% drop last May. The dip for personal consumption spending was the greatest since a 1.3% plunge last October.

Both declines followed substantial increases in December. Personal spending shot up 1.2% that month, while consumer spending rose by 2.1% for the biggest gain in more than a decade.

But the department said that, if the unusual factors were removed, incomes would have grown by only 0.7% in December and that, instead of a decline, there would have been a small 0.2% income gain in January.

Predicts Faster Growth

"If you cut through the entanglements of the special factors, the January figures show a modest gain in income growth, and I think we will see more of a pickup in growth in coming months," said Robert Ortner, chief economist for the Commerce Department.

The December income number was inflated by an unusually large increase in government subsidy payments to farmers of $13.1 billion at an annual rate. In January, farm income fell at an annual rate of $16.3 billion because the subsidy payments fell.

Changes in the Social Security program both added and subtracted from income in January.

Retirees got a 3.1% cost-of-living increase in Social Security benefits in January, which pushed up income by $6.4 billion at an annual rate, but increases in Social Security taxes subtracted $3.5 billion from income gains. The changes increased the wage base taxed by Social Security from $39,600 to $42,000 while boosting the tax rates as well.

The increase in Social Security taxes was partially offset by the second year of tax indexing, which expands tax brackets to take into account the effects of inflation on income levels. This change will translate into a tax cut of about $7.2 billion in 1986, the Commerce Department estimated.

The department said the various factors left personal income at an annual rate of $3.382 trillion last month, down $2.8 billion from December.

Despite strong gains in employment in January, wages and salaries rose only $6.5 billion following December's $15.2-billion increase. However, the December figure was inflated by retroactive payments for a military pay raise and by large year-end salary bonuses in some industries.

"What you need to do is average the changes in December and January to get a realistic picture of what the economy is doing," said Michael Evans, head of a Washington consulting firm. "We are optimistic about future income gains because employment and wages are both increasing."

Evans said the income gains would translate into increases in consumer spending as well. He said declining interest rates and falling energy prices would leave consumers with more money to spend.

Some analysts have expressed concern that consumers may start cutting back on spending this year because of record-high debt levels and low savings rates. But the January report said the personal savings level--savings as a percent of disposable income--increased to 4% from 3.7% in December.

Disposable, or after-tax income, also rose last month by 0.2% following a 1.2% December gain.

Decline in Spending

Personal consumption spending totaled $2.68 trillion at an annual rate in January, a decline of $10.6 billion from the December level.

Purchases of durable goods, items expected to last three or more years, dropped $2.3 billion in January, while spending on non-durable goods declined by $4.3 billion. The services category, which includes housing expenses, showed a $3.9-billion decline after a huge $21.8-billion December increase.

But the government said the big December jump came from higher-than-normal heating bills, while heating costs fell sharply in January because of unusually mild weather.

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