WASHINGTON — Consumers opened their wallets more than expected in December even though their incomes failed to grow, but their confidence slipped in January amid concerns about whether the recent upturn in economic momentum can be sustained.
Spending rose 0.4% in December after an upwardly revised 0.6% increase the previous month, the Commerce Department reported Friday. Economists had projected only a 0.2% rise for December.
Consumers spent more even though personal income was flat in December, a worrisome sign for future activity. Economists had expected incomes to grow 0.2%, the same as they did in November.
December was the weakest month for income growth since October, when there was a decline of 0.1%.
"The consumer has a lot of spending momentum and is off to a good start for 2014," said Chris Rupkey, chief economist at Bank of Tokyo-Mitsubishi in New York.
Consumer spending helped boost economic growth in the final three months of last year, the Commerce Department said this week. Spending increased 3.3% in the quarter, the fastest pace in three years.
But the recent stock market downturn could squelch spending because people won't feel as wealthy with the value of their investments and retirement funds declining, Rupkey said.
In a sign that spending already could be off more than expected, consumer confidence slipped in January, the University of Michigan and Thomson Reuters said Friday.
Their consumer sentiment index dropped to 81.2 from 82.5 in December.
The January figure was well above the 73.8 level recorded for the same month last year, and confidence was slightly improved from the preliminary January number.
Although consumers gave their recent financial progress the best rating in six months, they were not as optimistic about the direction of the economy.
"Despite the recent economic gains, consumers' outlook for their finances as well as the national economy over the longer term have remained more resistant to improvement than in past recoveries," said Richard Curtin, chief economist for the monthly University of Michigan/Reuters survey.
"Optimism about long-term job and income prospects are essential for maintaining high levels of economic motivation," he said. "Too few consumers have regained that optimism."
Consumer confidence could take an additional hit in the coming months.
The unusually cold weather in much of the country caused home heating bills to rise, a strain for lower-income families, Curtin warned. And stock market declines, combined with slower gains in home values, will affect higher earners.
Increased spending in December, combined with flat incomes, led Americans to save less. The savings rate was 3.9%, down from 4.3% in November, and hit its lowest level since January 2013.
Still, inflation remained well in check. The so-called core rate over the previous year increased 1.2% in December, up slightly from the previous month but below the Federal Reserve's target of 2%.Copyright © 2014, The Baltimore Sun