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Americans earning and saving more

By Hibah Yousuf, staff reporter


NEW YORK (CNNMoney) -- Americans earned more than expected in January, thanks to tax changes that boosted income, but consumers chose to add more to their savings at the start of year.

Personal income surged 1% in January, following a 0.4% increase in December, according to data released Monday by the Commerce Department. Economists surveyed by Briefing.com were predicting a modest increase of just 0.3% in the month.

But consumers chose to stash the extra cash, rather than spend it. Americans saved $677.1 billion during the first month of the year, compared with $620.9 billion the prior month. And personal savings as a percentage of disposable income rose to 5.8% from 5.4% in December.

Meanwhile, spending by individuals ticked up just 0.2%, compared to a 0.5% increase the prior month. Economists were expecting an increase of 0.4% in January.

"Consumers remain in a very cautious mood," said Mark Vitner, senior economist at Wells Fargo. "They went out and splurged during the holiday season, but they're not in the mood to do that again. In order to see spending grow faster than income, the economy needs stronger job growth."

Income was lifted by a reduction in employee social security contributions, which was part of the payroll tax cut passed by lawmakers in late 2010, as well as the expiration of the Making Work Pay tax provisions, rather than higher salaries and wages.

In fact, private sector wage and salaries increased by $14.8 billion, or 0.3% last month, compared to a 0.4% rise in December.

While the tax change was fully reflected in the January personal income figure, Americans will continue to see the extra cash in their weekly paychecks throughout the year, said Vitner.

"Workers didn't get all the gains for the year in their first paycheck," Vitner said. "Plus, evidence shows that consumers don't alter their behavior according to temporary tax changes."

Excluding the tax factors, income increased just 0.1% during the month, the government said.

Vitner added that severe winter weather in January and high food and energy prices also put pressure on spending levels during the month. To top of page

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