In January of this year incomes dropped the most they have in 20 years. Let me just allow that to sink in. With the payroll tax cuts expiring January 1st, it is no surprise that people’s incomes fell and were spending and saving differently. Consumer spending rose in January, which seems to indicate that with these tax increases, households were forced to spend more of their income and save less.
Incomes fell by 3. 6 percent in January! This then sent the savings rate down to the lowest it’s been since November of 2007. What Americans now face is trying to rebuild their savings while facing rising costs on average daily goods, like gasoline. Obviously the increase in payroll tax that came in the beginning of the year is not helping Americans by lowering their incomes.
In addition to personal income, the stock market had a rough month as well. “Stock-index futures held earlier losses after the report. The contract on the Standard & Poor’s 500 Index maturing this month dropped 0.5 percent to 1,506.3 at 9:17 a.m. in New York.”
What may be most alarming is the severe drop in disposable income, or the money left over after taxes are taken out. Disposable income dropped 4 percent (after adjusting for inflation), this is the biggest plunge since they began monthly records in 1959! This severe loss in disposable income is due to the expiration of the Bush tax cuts and timing of bonuses and dividends.
Until Congress and President Obama see what the increase in payroll taxes has caused we most likely will continue to see this type of economy, one where people are not able to save because their entire income is now going to expenses. With increasing gas prices as well, this will most likely continue into February’s data. Looks like things are really turning around for us, NOT.