by Raul Hernandez

Driven by strong January wage gains, American consumers increased their spending in a sign that consumer confidence is on the rise.

Personal incomes rose 0.5 percent during the month, according to the U.S. Department of Commerce, with more than half of that growth coming from wages and salaries. This was an uptick from the 0.3 percent gains from each of the previous three months.

Personal consumption expenditures, which measure spending on everything from groceries to clothing to movies, increased 0.5 percent. Spending increased an upwardly revised 0.1 percent in December after a 0.4 percent gain in November.


January’s healthy spending numbers beat the consensus projections from economists, with some even forecasting a negative growth rate from the previous month.

“The income and spending numbers were certainly on the firm side of expectations,” said 4CAST Inc Senior Economist, David Sloan. “They picked up after some slightly disappointing fourth quarter numbers so it’s certainly a good start to the first quarter.”

January spending was especially strong on durable goods – items built to last for at least three years – increasing 1.2 percent after falling by 0.4 percent in the previous month. Consumer spending on nondurable goods, such as clothing and gasoline, stayed flat compared to December.

The personal savings rate, shown as a percentage of disposable income, remained steady at 5.2 percent from December. The personal savings rate has stayed between 5.0 and 5.2 percent since July of last year and only dipped below 5.0 twice since December of 2014.

January’s cold temperatures provided a boost to consumer spending prompting some economists to take a more prudent approach to analyzing these strong surface numbers.

“I would caution that the income numbers may not be quite as strong as they seem,” said Scott Brown, Chief Economist at Raymond James Financial Inc. “With the spending numbers, you had mild temperatures in December meaning less home heating. More normal temperatures in January meant a bit of a rebound there, but when you average the two numbers, the trend is still pretty good.”

The increase in spending is certainly a welcome sight compared to the spending numbers of the last two Januarys. When adjusted for the rate of inflation, the month over month spending growth rate from January 2013 and 2014 was -0.5 and 0.1 percent, respectively, compared to this January’s much improved 0.4 percent.

Friday’s report also indicated the inflation rate appears to be showing sings of life, though it remains below the Federal Reserve’s 2 percent ideal annual rate for the 45th straight month.

The price index for core personal consumption expenditures, the Fed’s favored inflation measure, rose to 1.7 percent. Core PCE, which excludes food and energy costs, has not been this high since July of 2014.

“That 1.7 figure really jumps out at you,” said Brown. “The Fed is looking at a situation where wage pressures are starting to build and as such they may be thinking about policy normalization and raising interest rates sometime down the line.”