Personal Income Makes Biggest Drop in 20 Years

Americans’ income dropped significantly in January, marking the deepest monthly decline in 20 years. But the sharp drop was apparently caused by one-time factors.

For most families, income was not quite so volatile. They saw their income decline because of the payroll tax hike, and most were not affected by the soar in dividend payments that companies paid in advance in December.

“The average person almost ignored these extraordinary ups and downs in personal income and kept on with a normal spending pattern,” said Douglas Porter, chief economist at BMO Capital Markets. “It’s like, easy come, easy go,” he added.

Personal income fell by $505.5 billion, or 3.6 percent, according to the report issued Friday by the Commerce Department.

Disposable income (total income minus taxes) plummeted January by 4 percent, or $491.4 billion – the biggest one-month fall since 1993.

“January looks so bad because December looked unusually good,” said Greg McBride, chief economist at The decline in disposable tax income in January followed a 2.7 percent increase in December, caused by a boom in dividend payments companies made to avoid a January tax hike that would affect top earners. In a deal to avoid last year’s fiscal cliff, lawmakers raised dividend and capital gains taxes on families making more than $450,000.
In addition, paychecks shrank because most of the workers started paying more to Social Security. In January, the 2010 payroll tax break expired, causing people to pay 2 percentage points more, raising contributions from 4.2 percent to 6.2 percent.

These factors excluded, disposable personal income inched up 0.3 percent, the same increase as in December.

The tax increases were one reason Americans spent more and saved less than in the previous months. Families saved 2.4 percent of their after-tax income in January, down from a 6.4 saving rate a month earlier, indicating that consumers are probably spending what they saved in November and December. The last months of 2012 both brought strong income gains because of the early dividends, but the increase in income didn’t affect spending, as consumers got nervous about the looming payroll tax hike.

It’s not clear how the payroll tax hike will affect consumer spending in the coming months, but the numbers released in February seem optimistic enough.
The Consumer Confidence Index, which measures how optimistic U.S. consumers are about the economy, rose higher than expected in February, despite an increase in gasoline prices and a smaller paycheck – a result of a payroll tax hike. With an increase in this closely-watched index came good numbers from February auto sales, with automakers reporting that they had sold more cars than predicted to U.S. consumers, an optimistic sign amid the uncertainty caused by the budget battles in Washington.

“The last months have been unusual in terms of personal income,” Porter said.
“We’ve got some indicators from February showing that consumer confidence has rebounded. We are walking into a slow and moderate growth in personal income in months ahead.”