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American incomes rise in December, but spending is flat

WASHINGTON — Americans' income rose in December by the most in nine months, a hopeful sign for the economy after a year of weak wage gains.

But consumers didn't spend any more than they did in November.

Americans ended up saving all their additional income.

Economists noted that income rose last month largely because of strong hiring. The economy added 200,000 jobs in December.

The best hope for the economy is further job gains. On Friday, the government is expected to report another solid month of hiring for January.

Income rose 0.5 percent from November to December, the Commerce Department said Monday. It was the sharpest increase since a similar gain in March.

The flat spending in December followed scant gains of 0.1 percent in both October and November.

For all of 2011, income barely rose. And consumers tapped their savings to spend more.

But in December, Americans boosted their savings. If they continue to save any additional income rather than spend it, the economy could slow. And that could force employers to pull back on hiring.

The savings rate increased to 4 percent of after-tax incomes in December, up from 3.5 percent in November.

For the year, the savings rate dipped to 4.4 percent from 5.3 percent in 2010. The savings rate had fallen to 1.5 percent in 2005, reflecting a housing boom that made people feel like spending more and saving less.

Many economists are holding out hope, though, that continued job gains will mean more spending across the economy.

"The pace of job growth in recent months, while still not satisfactory compared to most past cycles, at least seems sufficient to generate enough income growth to keep consumer spending moving ahead at a modest pace," said Joshua Shapiro, chief U.S. economist at MFR Inc.

After-tax income adjusted for inflation rose 0.3 percent in December. For the year, inflation-adjusted income rose 0.9 percent, just half the rise in 2010.

Inflation-adjusted consumer spending rose just 2.2 percent last year, slightly better than in 2010.

Consumer spending was flat in December, even though retail sales rose slightly and retailers reported modest holiday sales.

Unemployment fell to 8.5 percent last month — the lowest level in nearly three years — after a sixth straight month of solid hiring.

Economists predict that 155,000 net jobs were created in January, according to a survey by Factset. Some are even estimating close to 200,000. The unemployment rate is expected to stay unchanged.

Still, the economy remains weak. The government said Friday that the economy grew at an annual rate of 1.7 percent last year — roughly half the growth of 2010.

Overall growth last quarter — and for all of last year — was slowed by the sharpest cuts in annual government spending in four decades.

And many people are reluctant to spend more or buy homes. Many employers remain hesitant to hire, even though job growth has strengthened.

American incomes rise in December, but spending is flat 01/30/12 [Last modified: Monday, January 30, 2012 7:47pm]
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