“There were some bright spots,” Wells Fargo senior economist Mark Vitner said. “Wage and salary growth has clearly improved in recent months, confirming the pickup in employment.”
The rise in income tracks the steady decline in the nation’s unemployment rate from 9 percent over the summer to 8.3 percent last month. The good news continued this week as new jobless claims hit their lowest level in four years. The number of people filing for unemployment benefits was 351,000, down from last week and fewer than analysts had expected.
Improvements in income and employment are crucial drivers of consumer spending and therefore key components of the country’s economic recovery. The pickup in the labor market gives consumers more confidence to spend, and more money in their wallets gives them the means to do so.
The problem is that so far it is unclear whether Americans will buy into that scenario.
Consumers have used part of the extra income to pad their savings. According to the government data released Thursday, the personal savings rate was 4.6 percent in January, down slightly from the previous month but up from the fall. Although economists, and many families, recognize that consumers need to shore up their finances after taking on excessive debt during last decade’s boom, a high savings rate can also slow the pace of recovery.
“They’re just sort of sitting back a little bit, saying, ‘I need to be a bit more cautious,’ ” said Paul Dales, senior U.S. economist for Capital Economics.
Meanwhile, higher gas prices are eating away at Americans’ bottom line. Consumer spending remained flat from November to January when adjusted for inflation, according to the government’s data. Disposable income — the money households have left over after taxes — actually declined 0.1 percent in January when inflation is factored in.
Gas prices are one of the main culprits. Vitner said energy costs have risen at a 4.8 percent annual rate in the past seven months. Government forecasts put the average price of a gallon of regular gasoline at $3.62 during the peak travel season from April to September, 7 cents higher than the projected annual average. And the government says there is a one-in-four chance that the average price at the pump could exceed $4 this summer.
“In order to make this a really sustainable, strong recovery, we need to have both declines in unemployment and strong growth in demand and production,” Federal Reserve Chairman Ben S. Bernanke told lawmakers Thursday during a hearing on Capitol Hill.