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Personal income rises again, but spending is restrained

Paychecks keep growing but more goes into savings, a trend that may keep the economy sputtering.

December 24, 2009|By Don Lee
  • Recruiters wait at a job fair in San Bruno, Calif. Unemployment dipped to 10% in November from 10.2% in October, the government reported. Those still employed saw their paychecks rise 0.4% last month, the fifth straight monthly advance.
Recruiters wait at a job fair in San Bruno, Calif. Unemployment dipped to… (Paul Sakuma / Associated…)

Reporting from Washington — Providing more evidence that the U.S. economy has turned a corner, personal income grew in November at the fastest rate in six months and is poised to accelerate in 2010, according to new government and private reports.

After plunging early this year, total personal income rose 0.4% last month, marking the fifth straight monthly advance, the Commerce Department said Wednesday. The gain was all the more notable because it came as the economy continued to lose jobs.

But the increase was relatively modest compared with income gains before the recession that began two years ago, and income growth could remain weak next year. In addition, with persistently high unemployment and continued uneasiness about the economy, Americans are saving much more of their after-tax income than they have for some time.

As a result, consumer spending and the economy as a whole are likely to remain lackluster for some time, many economists believe.

"It is encouraging that income appears to be growing at a steady pace," Paul Dales, an economist at the research firm Capital Economics, wrote in a research note. "But annualized income growth of less than 2% will not be enough to drive a significant recovery in consumption. . . . We fear that the economic recovery will fade in the second half of next year."


FOR THE RECORD:Two charts on personal income and spending accompanying an earlier version of this article said the figures were in billions of dollars. They should have been in trillions of dollars.

Part of the latest increase in personal income stemmed from growth in hours worked, rather than higher rates of pay. Although most workers might prefer the latter, increased hours are usually a leading indicator of a strengthening job market and overall economy. That's because employers tend to increase the hours -- and thus the paychecks -- of existing workers before adding new names to their payrolls.

Separate Commerce Department figures released Wednesday showed new-home sales plunged last month, and with federal stimulus programs fading next year, many analysts are wondering what will propel an economy that has relied on consumer spending for about 70% of its activity.

"There's so much uncertainty out there," said Loree Griffith, a principal at Mercer, a human resources consulting firm.

Although fewer large firms are planning to freeze wages next year -- 14% compared with 30% in 2009 -- employers are budgeting pay raises averaging just 2.3% in 2010, up only fractionally from 2.1% planned for this year, according to Mercer's annual survey of employee compensation.

That's barely enough to keep up with inflation and pales next to the 4% or so annual salary increases in most of this decade.

The outlook is not necessarily more promising for workers at smaller firms.

"You know, I am going to wait and see," said Steve Hasty, president of A&E Custom Manufacturing, when asked whether he was planning raises for next year.

The Kansas metal fabricator is ending 2009 with 45 employees, the same number the firm started the year with. But in between, the company's payroll was on a roller coaster.

A&E laid off and then recalled seven workers, and everyone's wages were sliced by 10% early in the year. In September, Hasty reinstated the previous pay rates. And, on revenue of $5 million this year, the company eked out a $100,000 profit -- 10% of which Hasty divvied up as Christmas bonuses to his workers.

Still, with sales projected to be down 15% from 2008 levels next year, Hasty says, he and many of his employees remain in a hunkered-down mode.

That sums up the situation at businesses and homes across the country. Both are paring debt and spending cautiously.

The U.S. personal savings rate -- the amount of after-tax income that is socked away -- continued to hover at nearly 5% in November, a sharp increase from the 1% to 2% average annual rate in the several years before the recession wiped out many people's jobs and personal wealth. Some economists see the savings rate climbing even higher, to as much as 8% -- a level not seen for decades.

Earlier this decade, savings nose-dived as Americans with easy access to credit ramped up their spending.

Now consumers are saving more because of job insecurities and the need to pay off debts. Many baby boomers are also looking to rebuild their nest eggs, and more employers are pushing workers to put part of their pay into retirement accounts -- in some cases diverting a specified percentage of pay into 401(k)s if employees don't make a choice themselves.

Over the long haul, greater savings should translate into more investment, which would ultimately help the economy. In the near term, however, higher savings would probably curb economic growth by keeping consumer spending sluggish.

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