AP News

Ahead of the Bell: US consumer spending


WASHINGTON (AP) — Consumers likely spent more in December, and their income probably accelerated slightly. Economists caution, though, that the gains might not last because most consumers are receiving less take-home pay starting this month.

Economists forecast that spending rose a seasonally adjusted 0.3 percent from November to December, according to a survey by FactSet, after a 0.4 percent increase from October to November. They predict that income grew 8 percent in December, up from a 0.6 percent increase in November.

One reason for the expected spending increase: The government has already reported that retail sales rose in December as consumers spent more on autos, furniture and clothing.

But consumer spending, which accounts for about 70 percent of economic activity, could slow this year as a result of higher Social Security taxes.

In a deal to avert the fiscal cliff of higher taxes and across-the-board spending cuts, Congress and the White House allowed a temporary reduction in Social Security taxes to expire this year.

A person earning $50,000 a year will have about $1,000 less to spend in 2013. A household with two high-paid workers will have up to $4,500 less.

The diminished pay could slow consumer spending and economic growth. Some analysts have estimated that the roughly $120 billion in higher Social Security taxes could subtract up to 0.7 percentage point from growth this year.

The government said Wednesday that the economy unexpectedly shrank in the October-December period at an annual rate of 0.1 percent. The dip was a reminder of the economy's vulnerability as automatic cuts in government spending loom.

The agreement on the fiscal cliff averted income tax cuts on all but the wealthiest Americans. But it only delayed across-the-board government spending cuts. The cuts are set to take effect on March 1 if no agreement is reached to avert them.

The Federal Reserve, after a two-day policy meeting, announced Wednesday that it was keeping all its aggressive stimulus programs in place. These include $85 billion a month in bond purchases. The purchases are intended to keep long-term interest rates down to encourage spending, boost growth and reduce still-high unemployment.

The Fed also left its target for short-term rates at a record low and said it would stay there at least until unemployment, now at 7.8 percent, stays above 6.5 percent. Many economists think unemployment remained at 7.8 percent in January. The January jobs report will be released Friday.

The Fed's statement said the economy had "paused" in recent months. But it blamed the slowdown mainly on temporary factors and predicted that growth would resume this year.


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