Originally created 03/03/98

Consumer spending up slightly



WASHINGTON -- Consumers' after-tax income in January recorded the biggest increase in more than a year and a half, putting cash in Americans' pockets that may help the economy withstand the Asian financial crisis.

Personal income overall increased a strong seasonally adjusted 0.6 percent, while disposable, or after-tax, income jumped 0.8 percent -- the largest gain since June 1996, the Commerce Department said Monday.

Even after adjustment for inflation, the disposable income gain remained a hefty 0.7 percent.

Economists said the advance should help support consumer spending, offering a counterweight as American manufacturers feel the pinch of declining demand from Asia.

They're predicting the U.S. expansion, which hit its seventh anniversary this month, will continue through 1998 and become the second-longest on record, exceeded only by the Vietnam War expansion of the 1960s.

"Two-thirds of the economy, the consumer sector, is in a very solid position as we enter the eighth year of economic expansion," said economist Lynn Reaser of NationsBank Corp. in Jacksonville, Fla.

"The Asian situation ultimately will filter down ... by slowing employment growth. But at this point, ... it is helping the consumer sector by holding down prices and interest rates as well," she said.

President Clinton, speaking to the Mortgage Bankers Association of America, hailed the income advance as "fresh new evidence the economy continues to grow.

"These are good times for our country," he said.

Consumer spending in January rose a moderate 0.4 percent in January, the same as in December and November. Because after-tax income increased faster than spending, the savings rate rose to 4.2 percent of disposable income, the most in seven months and up from 3.9 percent in December.

Two other reports also depicted a resilient economy at the start of 1998. An index compiled by the National Association of Purchasing Management showed manufacturing rebounded in February after two monthly declines.

Also, construction spending rose a seasonally adjusted 0.7 percent in January, according to a second Commerce Department report. Warmer-than-usual weather caused by El Nino supported gains of 1 percent in both housing and commercial construction. They more than offset a 0.6 percent drop in government projects.

Economist Mark Vitner of First Union Corp. in Charlotte, N.C., said the purchasing managers' report suggests "the sting from Asia's troubles might not be as bad as widely feared."

It spooked the bond market because it suggested the Federal Reserve might not be able to rely on the impact of Asia to slow the U.S. economy to what it considers a non-inflationary growth rate. It makes the prospect of an interest-rate cut from the Fed more remote.

Prices on the benchmark 30-year Treasury bond fell, pushing the yield from 5.92 percent late Friday to 6.01 percent, the highest since mid-December.

But the stock market, in an up-and-down day, managed a small gain. The Dow Jones average of industrial stocks rose 4.73 points to 8,550.45, its fourth consecutive record close. It had gained 175 points in the previous three sessions.

Income in January was affected by several special factors. Social Security recipients saw a 2.1 percent cost-of-living increase in their benefits and federal employees received raises.

Payroll tax payments increased in January because the upper limit of taxable wages rose from $65,400 to $68,400. But federal income tax payments went down more than that after the government adjusted withholding to reflect tax cuts passed last year.