US Consumers Keep Spending, Despite Reduced Pay

This year got off to a sour start for U.S. workers: Their pay, already gasping to keep pace with inflation, was suddenly shrunk by a Social Security tax increase. Which raised a worrisome question: Would consumers stop spending and further slow the economy? Nope. Not yet, anyway. On Friday, the government said consumers spent 3.2 percent more on an annual basis in the January-March

quarter than in the previous quarter—the biggest jump in two years. It highlighted a broader improvement in Americans' financial health that is blunting the impact of the tax increase and raising hopes for more sustainable growth. Consumers have shed debt. Gasoline has gotten cheaper. Rising home values and record stock prices have restored household wealth to its pre-recession high. And employers are steadily adding jobs, which means more people have money to spend. "No one should write off the consumer simply because of the 2 percentage-point increase in payroll taxes," says Bernard Baumohl, chief economist at the Economic Outlook Group. 

"Overall household finances are in the best shape in more than five years." Certainly, spending weakened toward the end of the January-March quarter. Spending at retailers fell in March by 0.4 percent, the worst showing in nine months. And more spending on utilities accounted for up to one-fourth of the increase in consumer spending in the January-March quarter, according to JPMorgan Chase economist Michael Feroli, because of colder weather. Higher spending on utilities isn't a barometer of consumer confidence the way spending on household goods, such as new appliances or furniture, would be. Americans also saved less in the first quarter, lowering the savings rate to 2.6 percent from 3.9 percent in 2012. Economists say that was likely a temporary response to the higher Social Security tax, and most expect the savings rate to rise back to last year's level. That could limit spending.