Americans pulled back on their spending in January, even as their incomes surged, a sign the economy was growing modestly before the threat of coronavirus arose.
The Commerce Department said Friday that consumer spending increased 0.2% last month, down from 0.4% in December and the smallest gain since October. Incomes, however, rose 0.6%, the biggest rise in nearly a year, spurred by bigger paychecks and an increase in Social Security benefits stemming from a cost of living adjustment.
The additional income could help offset the likely drag from this week’s stock market plunge and the broader threat from the coronavirus, which has caused many economists to slice their estimates for growth in the first three months of the year. Most analysts now forecast that the U.S. economy will expand at a roughly 1.5% annual pace in the first quarter, down from 2.1% in the fourth quarter.
The viral outbreak in China has spread to more than 30 countries and has disrupted global supply chains, forcing many companies to mark down their profit estimates. Microsoft and Apple are among those that have said the disease and factory shutdowns in China have made it impossible for them to meet demand for their products.
Should the coronavirus spread in the United States and more broadly overseas, economists worry that a sharp, if brief, recession could ensue. Widespread cancellations of travel plans are already hitting hotel revenues, and if more people stay away from work, shopping and restaurants, the economic damage would worsen dramatically.
The stock market’s plunge of roughly 12% this week may discourage many wealthier Americans from spending, which could also weigh on the economy’s growth.
Last month’s modest spending increase in the Commerce report, coupled with the strong income gain, boosted Americans’ savings rate to 7.9%, the highest since April. That means consumers have some additional spending power even if income growth slows.