Personal Income and Spending Rise in January

In a sign the consumer may be willing to part with a few more dollars as economic conditions improve, real consumer spending rose 0.3% in January, the Commerce Department announced Monday. It was the largest monthly consumer spending increase in real terms since May 2008.

Meanwhile, personal income rose 0.1% in January. Unadjusted for inflation, consumer spending rose 0.5%. Economists surveyed by Bloomberg News had expected personal income and consumer spending to each rise 0.4%.

Further, the nation continues to save at an impressive rate, but with consumer spending rising faster than incomes, the U.S savings rate fell to 3.3% in January from 4.2% in December.

Inflation Remains Tame

There were few morsels for the inflation hawks to chew on in January, as the core PCE price index was unchanged in January after an 0.1% increase in December; the Bloomberg News survey had expected the core rate to remain unchanged in January. The top-line PCE index, which includes food and energy, rose 0.2% in January.

Moreover, in the past year, consumer prices have risen 2.1 %, while the core rate has risen just 1.4%. That core rate is well within the U.S. Federal Reserve's 'comfort zone' for inflation.

From an investor standpoint, January's personal income and consumer spending report was encouraging, since both personal income and consumer spending must increase for corporate revenue and earnings to advance at healthy rates. That's because historically consumer spending accounts for 60-65% of U.S. GDP, but it remains to be seen whether that percentage will hold in a restructured U.S. economy. Higher real incomes enable Americans to increase spending while saving or avoiding credit card debt.

Meanwhile, the lack of inflation is good news for investors and policy makers alike: it will enable the U.S. Federal Reserve to extend its accommodative monetary policy for a longer period of time, which will help support a sustained expansion.

Also, the saving rate, although it dipped to 3.3%, still indicates that Americans want to save at a healthier rate than in the previous decade, when they saved very little. (The savings actually went negative for a while in the previous decade.) A high savings rate is beneficial in the long run because it will increase the supply of capital available for investment -- and help rebuild Americans' nest eggs.