Households continued to earn and spend in January, but at a pace that just barely kept up with inflation, showing early signs of hesitation in consumer demand.
January’s personal income data, released by the Bureau of Economic Analysis, showed income rising 0.4%, up from December’s 0.3% growth. Consumer spending rose 0.4%, but after adjusting for inflation the increase was only 0.1%.
The report showed an increase in disposable income, the amount households have to spend after taxes and Social Security contributions. At the same time, consumers are saving more than last month, though that level remains lower than it was before the pandemic.
Taken together, the data suggests that income has managed to outpace inflation so far, and consumers are continuing to spend, though inflation limited gains in real consumer spending. Inflation, measured by the Federal Reserve’s preferred gauge, rose 2.8% over the past year, staying above the central bank’s 2% target and dimming expectations for interest rate cuts.
“It just tells you the consumer wasn’t that strong toward the end of the year and into January,” said Oscar Munoz, chief U.S. macro strategist at TD Securities.
At the same time, a rise in the personal savings rate suggests that consumers are holding on to more of their income gains, a cautious sign that they might be growing more reluctant to spend. In an economy where consumer spending drives growth, economists are watching whether demand will stay resilient, since household purchases make up the largest share of the U.S. economy.
“The savings rate is a bit of a shock absorber for the economy. If consumers face higher prices for things like gasoline, they can temporarily reduce savings to keep spending on track,” said Tom Simons, chief U.S. economist at Jefferies.
January’s report includes the annual Social Security cost of living adjustment, which typically boosts payouts at the beginning of the year. Economists noted that many of the income gains this month also came from dividend payouts, which tend to benefit higher income households more than lower income earners.
Because those gains are not evenly distributed, even subtle shifts in consumer spending can signal warning signs in an economy that has held steady in the face of inflation. While higher income earners are continuing to earn and spend more, middle and lower income households are more vulnerable to rising prices.
For some households, those increases have limited how far income stretches.
Chaelaray Johansen, a first-year teacher from Rochester Hills, Michigan, said that while her income has remained steady, rising prices have made it harder for her to cover everyday expenses.
“I’ve definitely had to cut back,” Johansen said. “Groceries need to last longer, stretching across multiple meals.”
Income growth is closely tied to the health of the labor market. While layoffs are still low, hiring has slowed and job openings remain limited, signaling concern that continued cooling in the labor market could eventually begin to weigh on future wage gains.
With increased tax refunds expected to hit households in the coming months, economists say some consumers may have additional flexibility in their finances, giving them room to save or spend.
The report does not yet capture prices as a result of the war with Iran, which could put pressure on household budgets and consumer spending in the coming months. That, in turn, could weigh on corporate profits and investment income, leaving the economy more vulnerable as a whole.
“Like it or not, the economic trajectory over the coming months will hinge largely on how long this conflict lasts,” said Tuan Nguyen, an economist at RSM.