Personal Income Collapses in January

The Commerce Department reported Friday that personal income contracted a sharp 3.6% in January. In three of the last four months, personal income had showed modest gains. Economists had expected a more modest drop in income of 2.5%. This, and other numbers released Friday suggest worrying trends for the economy.

Wages and salaries declined in January, while personal disposable income dropped by 4%. Government wages and salaries, however, increased in January. Personal consumption was essentially unchanged, rising by 0.2%. The savings rate dipped from 6.4% in December to 2.4% in January. 

The data released Friday is consistent with revised GDP figures from Thursday. GDP revisions found consumer spending weaker than expected or initially estimated. That trend seems to have carried over into January, with consumers saving less to maintain their level of spending. The drop in wages will likely drag consumer spending weaker in the 1st Quarter. 

There is likely some noise in the data, due to expected changes in the tax code at the end of the year. Some people might have artificially boosted earnings in December to avoid increased taxes in the new year. While that no doubt is likely a factor, the totality of the data still point to a very weak economy and bleak outlook for earnings. 

The economy is beginning the new year with a whimper. 

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