Caught in the Middle: Rising Costs and Declining Disposable Income Put the Squeeze on American Consumers

First, the good news is that consumer spending (adjusted for inflation) rose in January according to the Commerce Department.  Because consumer spending makes up about 70% of the economic activity in the US, more spending is good news and it is key to our forecast of ongoing expansion in the US in the coming quarters.  

The bad news is that income dropped in January as higher taxes began to take a bite out of take-home pay.  January’s Disposable Personal Income fell 3.98% from December to January, the steepest January decline on record (spanning 54 years).  The increase in income taxes and the return of the FICA tax to its traditional level caused the decline.  One month does not make a trend, but we will watch this carefully as we go through the next few months. 

The decline in income is occurring concurrently with the increase in gasoline and food prices.  A continual squeeze on income or on the cost of living will cause the economy to cool noticeably later this year.  Leaders in the retail environment need to be especially sensitive to these changes and market to increasingly budget conscious buyers.