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February 28, 2011 at 11:53 AM
WASHINGTON (AP) — A Social Security tax cut that economists say should help the economy this year is off to a slow start. Consumers increased their spending last month at the weakest pace since June, even with the extra money in their paychecks.
Some people may be using the additional money to pay down holiday credit card bills or higher gas prices, analysts said. And harsh weather may have deterred some people from shopping in January.
Personal finance experts say the real test of the tax cuts impact will come this spring, when the Easter holiday sales begin.
Still, consumers increased spending by only 0.2% in January, the smallest gain since June, the Commerce Department said Monday. At the same time, their incomes rose 1% — the biggest jump in nearly two years and a reflection of the tax cut.
The increased income is part of an additional $110 billion that economists say workers will receive this year from the cut in their Social Security taxes. Most families will see about $1,000 to $2,000 in extra income. Households with two high-income earners could receive up to $4,000 more.
In December, when President Barack Obama signed the tax cut as part of a broader tax package, economists predicted Americans would spendabout two-thirds of the extra money and save the remaining one-third. Higher-income taxpayers were expected to save a little more; lower-income households would spenda bit more.
Economists said the extra spending would help boost growth and could lead businesses to hire more. Still, all that was before tensions in the Middle East sent oil prices spiking. And a surge in global commodity prices is now expected to push U.S. food prices up slightly this year, too.
Many analysts say such inflation could siphon off most of the benefit of the tax cut. Several scaled back expectations for growth Monday after seeing January's disappointing report.
"It doesn't look like the economy is going to get any strong net boost from the Social Security tax cut," said Paul Dales, senior economist at Capital Economics. "It will just go to pay higher prices on food and energy."
Consumer spending was growing at the fastest pace in four years in the final three months of 2010, helping to support the overall economy. The weak showing in January raised questions about how strong consumer spending, which accounts for 70% of economic activity, will be this year.
The modest 0.2% rise in spendingwas even weaker when inflation was taken into account. After adjusting for price changes — particularly a steep rise in energy costs — spendingactually dipped 0.1% in January. That was the poorest showing since September 2009.
One factor that the report doesn't take into account is how much was spent on reducing debt. Households may have boosted their spending in December — after hearing about the pending tax cut — and spent the extra money in January to pay credit card bills.
