Though their incomes seem to be stuck in limbo, Americans opted to spend, rather than save, more of their paychecks as 2013 drew to a close, according to data just released by the U.S. Department of Commerce.
Total personal consumption expenditures totaled $11.7 trillion in December, a 3.5% rise on a 12-month smoothed basis, the biggest monthly increase in the category in over a year.
Personal disposable (after-tax) income fell by 1.6% in December compared to December 2012. However, the surge in December 2012 income was an anomaly, caused by high income earners who accelerated income into 2012 to avoid higher 2013 income taxes. This acceleration took a big toll on January 2013 income growth, as shown in the chart below. For the full year, disposable income grew 1.6% to $12.47 trillion, helped by rising stock market values and an improved job market. The national unemployment rate declined in 2013 from 7.9% to 6.7% in 2013.
A big portion of the increase in consumer spending was on durables, particularly automobiles, as many Americans continued to replace aging vehicles. Most retail economists expect this strength in the auto sector to persist through 2014. The increased spending on durables has taken dollars away from other discretionary categories like apparel, accessories, beauty products and gifts. Durables spending increased by 5.6% in December, compared to 2.2% for nondurables.
People are saving less of their income. The personal savings rate dropped to 3.9% in December, the first time since January 2013 that the rate has fallen below 4%. The income acceleration in December 2012 also increased the savings rate for that month, when then dropped precipitously in January 2013. Taking January 2013 out of the comparison, December’s savings rate was the lowest since August 2008, during the depths of the Great Recession.
Consumers are using more cash and debit cards, and putting fewer purchases on credit cards. Although consumers have stopped deleveraging, or paying down credit card debt, they haven’t increased their use of plastic very much: credit card debt has actually declined in the most recent two months for which data are available. Consumers are both skittish about taking on debt that they might not be able to pay off and increasingly concerned about security. The recent breaches at Target and other retailers, in which over a hundred million consumer records were compromised, have many Americans hesitant to use credit cards while shopping, fearing that it might lead to identity theft.