Consumer spending rises, but so does saving

There's an upside and a downside to January's personal income and spending data announced Monday by the Commerce Department.

The upside: Personal income rose 0.4% and consumer spending rose 0.6% -- both above the Bloomberg News consensus estimates, and those stats bode well for a return to growth.

The downside: the U.S. savings rate in January rose to a 5.0% annualized rate - - the highest rate since 1995. The reason a higher savings rate is a downer? It reflects a high level of caution among U.S. citizens, who are hunkering-down and increasing their savings, given the recession and poor economic outlook for the next two quarters.

Moreover, the high rate of savings means fewer consumer dollars will work their way into retail and related operations -- a trend that will delay the U.S. recovery. Historically, consumer spending has accounted for about 60-65% of U.S. GDP, although that percentage may decline in the years ahead, if consumers remain frugal.

Scott Brown, chief economist for Ray James & Associates, told Bloomberg News Monday the data represents "a pretty bleak picture for the economy in the near term."

Meanwhile, the core PCE deflator,a key gauge of inflation monitored by the U.S. Federal Reserve, increased 0.1% in January, and is up 1.6% in the past year. Each is within the Fed's comfort zone for inflation

Economic Analysis: In normal times, the high savings rate would be a plus, particularly on the heels of more than five years of below-average savings by Americans, since U.S. citizens do need to save more. However, as noted, the problem with a high savings rate now is that it takes that many more dollars out of an already commerce constrained U.S. economy.

Hence, it is a dilemma of sorts: Americans need to save more but the economy needs more dollars at work in it -- and that only underscores why no one should fear a rise inflation. There aren't enough dollars working in the U.S. economy right now -- the main reason a large stimulus package was passed, and why another package may be needed down the road.
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