U.S. After-Tax Incomes Rise Due to Tax-Code Changes, Spending Slows

Americans’ after-tax incomes jumped in the first month the new tax law took effect, but U.S. consumer spending slowed in January.

Personal income–reflecting Americans’ pretax earnings from salaries, investments and other sources–rose 0.4% in January from December, matching the prior month’s gain, the Commerce Department said Thursday.

But after-tax income rose 0.9%, matching the largest monthly gain since December 2012, another month when tax-law changes caused earnings to shift. The Commerce Department estimated that the changes to the tax code reduced personal taxes paid at a $115.5 billion annual rate in January.

The department also increased its estimate of earnings by $30 billion, based on companies announcing bonuses early this year. The department said the estimates could be revised later this year.

Despite the income increase, household outlays rose at a slower pace.

Personal consumption expenditures, a measure of household spending on everything from doctor visits to groceries, increased a seasonally adjusted 0.2% in January from the prior month, the Commerce Department said Thursday. It matched the smallest monthly increase since June.

Economists surveyed by The Wall Street Journal had forecast a 0.2% rise in spending and a 0.3% rise in pre-tax incomes.

Better incomes and slower spending caused Americans to save more of their earnings. The personal-saving rate was 3.2% in January, up significantly from 2.5% in December. The prior month’s rate was the lowest in more than a decade.

Meanwhile, prices rose during the month.

The price index for personal consumption expenditures, the Federal Reserve’s preferred inflation measure, advanced 0.4% in January from a month earlier. From a year earlier, the price index advanced 1.7%. The annual gain was the same as recorded in December and November. The index has undershot the Fed’s 2% target for annual inflation in 67 of the last 69 months.

Prices excluding the often-volatile food and energy categories rose a seasonally adjusted 0.3% in January. That matched January 2017 and several other months as the strongest one-month increase since January 2007.

From a year earlier, so-called core prices advanced 1.5%. Core prices have advanced at that same annual rate since October.

Stronger underlying price gains could encourage the Fed to be slightly more aggressive in lifting its interest rates in an effort to keep inflation in check. Chairman Jerome Powell’s upbeat assessment of the economy to lawmakers on Tuesday caused some Fed observers to say the central bank is likely to raise its benchmark interest four times this year, rather than the three moves policy makers penciled in for 2018 in December.

In testimony to Congress Tuesday, Mr. Powell said he viewed the core price index as a more reliable gauge of where inflation is headed, and noted readings had strengthened toward the end of last year.

“In this environment, we anticipate that inflation on a 12-month basis will move up this year and stabilize” near the Fed’s 2% target, he said. Fed officials next meet March 20-21.

U.S. equity markets fell sharply in early February, in part because emerging signs of stronger inflation and better wage gains caused investors to worry that the Fed could be more aggressive in raising interest rates, a move that could hurt stock values. Stock prices rose later in the month, but haven’t fully recovered losses.

Other measures of inflation, including the Labor Department’s consumer-price index, have risen at a faster pace in recent months. That gauge is calculated differently, and is more weighted toward housing costs, which have been rising. The CPI advanced 2.1% in January from a year earlier.

When factoring in stronger inflation, consumer spending fell 0.1% in January, the first decline in a year.

High consumer confidence, low unemployment and growing wages are expected to support household outlays this year. But January’s lackluster reading is consistent with another government report showing sales at stores and online retailers slumped during the month.

A slowdown in spending, if it were sustained in coming months, would be an impediment to overall growth. Consumer spending accounts for about two-thirds of economic output. U.S. gross domestic product expanded at a 2.5% annual rate in the fourth quarter, an easing from a better-than-3% growth rate the prior two quarters. Forecasting firm Macroeconomic Advisers projected Wednesday for first-quarter growth to slow further, to a 1.8% rate.

After-tax income, adjusted for inflation, increased 0.6% in January, the best gain since the end of 2012.
Source: Dow Jones