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Incomes Stall as Interest on Savings Dwindles

October 28, 2011 by   - () Leave a Comment

Americans’ incomes have stagnated for three straight months. Yet they boosted their spending in September 0.6% — three times the increase in August.

Under normal circumstances, that would be a troubling sign for the economy.

But a closer look at today’s (Oct. 28) report from the Commerce Department on September income and spending suggests another possibility: Many people are cutting their savings because the interest they are earning has become nearly worthless, The Associated Press reported.

Consumers earned only 0.1% last month. And after adjusting for inflation, their after-tax incomes fell 0.1%  last month — the third straight monthly decline.

But the decline was largely because of a 1.4% drop in interest income last month, the third sharp monthly drop. Wages and salaries increased 0.3% in September.

Paul Ashworth, chief U.S. economist at Capital Economics, said the report could signal that there is a transfer of income from those who saved to those with high debts, which could result in more spending by consumers.

“The sharp decline in the saving rate doesn’t concern us quite as much as it did, since it is possible that it partly reflects a sharp decline in debt servicing costs,” Ashworth said.

Consumer spending is closely watched because it accounts for 70% of economic activity. A sharp rise in spending over the summer helped fuel annual growth of 2.5% in the July-September quarter, the best quarterly expansion in a year.

Still, the economy would have to grow at nearly double the third-quarter pace to make a dent in the unemployment rate, which has stayed near 9% since the recession officially ended more than two years ago.

In recent months, job growth has stagnated. Employers have added an average of only 72,000 jobs per month in the past five months. That’s far below the 100,000 per month needed to keep up with population growth. And it’s down from an average of 180,000 in the first four months of this year.

Employers added only 103,000 jobs in September, and the unemployment rate remained 9.1 percent for a third straight month.

The government releases the October employment report on Nov. 4.

And spending could tumble next year if Congress fails to extend a Social Security tax cut, which gave most Americans an extra $1,000 to $2,000 this year, or long-term unemployment benefits. Both expire at the end of the year.

The spending increases in September included a 2.2% jump in purchases of durable goods, reflecting strong car sales during the month. Sales of non-durable goods such as clothing were also up a solid 1.1% while purchases of services such as rent and utility payments edged up 0.%.

Inflation, as measured by a price gauge tied to consumer spending, edged up 0.2% in September. But core inflation, which excludes food and energy, showed no gain at all. That left core inflation rising at a moderate 1.6% over the last 12 months.

Many economists worry that consumers won’t be able to keep spending like they did this summer without earning more. For spending gains to be sustained, employers need to step up hiring.

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