The Commerce Department recently reported that personal income in the U.S. saw its greatest monthly decline in 20 years this past January. That news set off a firestorm of articles about the decline, and if you only skimmed the headlines, you probably didn’t get the full story.
First off, it’s not as bad as it sounds. Because we were on the fiscal cliff in December and a bunch of tax cuts were set to expire on December 31st, many companies paid shareholders their dividends early so that the payments would be taxable at a more favorable time than they expected 2013 to be. That means that December’s income was artificially bumped up, leaving January’s income nowhere to go but down.
Although, There Was Some Truth
But it wasn’t all a false flag. You’ve probably noticed by now that your paycheck is a little lighter each pay period, thanks to the expiration of the payroll tax cut. For a time, this cut allowed your employer to reduce your contribution to Social Security by 2 percent. Now that it’s expired, everyone has the first $100,000 of pay taxed by that additional 2 percent.
What A Real Fluctuation Could Mean
When there are reports of income levels dropping, even when a large part of the drop is due to an accelerated dividend as we saw in December, it can send a chill through consumers making them much less likely to spend money on unnecessary items. This results in lower profits for retailers and could bring about business contraction, which might mean fewer hours for employees, less money for hiring and no raises.
It can also motivate retailers to offer more sales, lowered prices and more incentives in order to help stimulate the economy. This can mean it becomes a great time for those with money to buy the things they need at a much lower price.
Gallup And Spending
The way that the general public reacts to news and information very much drives our economy and, as such, your employment and pay—but it’s difficult to predict how people will react in advance. To see how the supposed January income dip affected spending, we can review the Gallup data. In December, Gallup found that average daily spending was up $10 per day from November (rising from $73 to $83). We already know that this could, in part, be due to the accelerated dividends paid in December—because people may have been planning on making certain retail purchases with those dividends rather than saving them. Of course, the holidays are another factor since they always increase the total spending. However, according to Gallup, the December 2012 increase was higher than it had been in December of 2009, 2010 and 2011.
In January, Gallup reported that spending fell slightly to $80 per day, then rose back to $83 in February, which is much less of a post-December decrease than we’ve seen in prior years. While this doesn’t match the 2008 February spending level of $106, it’s certainly a comforting number especially when considering the fact that the payroll tax cut has hit everyone’s wallet. Gallup admits that these numbers might be slightly skewed since they have only recently begun allowing more cellphone-only respondents to participate in the survey.
What this information should really point out to you is that a) consumer spending is sometimes unpredictable and b) news headlines don’t always tell the full story. However, it does illustrate a good reason to err on the side of caution and focus on saving before spending. That way, no matter what, you’ve got the savings to deal with fluctuations in income and the economy and to take advantage of any sales or incentives that crop up as a result.