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Wage gains offer welcome relief to workers

After lagging the growth in spending, personal income rose solidly in December.

American consumers caught a break in their paychecks in December – and the money went right into their saving accounts.

That could help ease the recent squeeze on household finances. But it’s not at all clear whether the trend will continue.

Personal income rose by 0.5 percent in December, after edging up just 0.1 percent in November, according to the Commerce Department. For months, wage gains have been meager, forcing consumers to lean more heavily on their credit cards to pay the bills. The income bump last month could help spur a bigger pickup in consumer spending, which would help keep the economic recovery on track.

“We need worker compensation to pick up if consumption is to rise,” said Joel Naroff, chief economist at Naroff Economic Advisors, “and that may finally be happening.”

Household budgets got some additional relief on prices, which edged up just 0.1 percent in December after holding steady in the prior two months. A decline in gas prices helped offset price rises elsewhere as energy prices fell 1.3 percent. For all of 2011, the Commerce Department’s price gauge rose 2.4 percent. (The government’s best-known inflation tracker, the Consumer Price Index, rose 3 percent in 2011, double the increase in 2010.)

But even as their spending power increased in December, consumers took the extra wages and stashed them in their savings accounts, leaving consumer spending flat for the month. The savings rate rose to 4 percent, the highest reading since August.

The boost in income was a welcome relief. Sluggish wage gains last year forced households to draw down their savings to pay the bills. Over the past 18 months the savings rate had fallen from 5.8 percent to just 3.5 percent in November. That trend was unsustainable, according to Capital Economics’ senior economist Paul Dales.

“Now households are devoting part of their additional income to boosting their savings,” he said. “That’s still not high enough, suggesting that real consumption probably won’t grow by much more than 1.5 percent this year.”

Continued sluggish consumer spending doesn’t bode well for the U.S. economy, which most economists believe will slow to a growth pace of just 2 percent this year. If income growth remains weak, so will the growth in consumer spending - which accounts for roughly 70 percent of gross domestic product.

“We expect consumer spending adjusted for inflation to increase about 2.2 percent this year,” said Chris Christopher Jr., a senior economist with IHS Global Insight. “This is nothing to write home about. However, compared to our counterparts in Europe – the American consumer and economy are looking relatively good.” 

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