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PERSONAL INCOME AND SPENDING RISE MORE THAN EXPECTED

Mar 29, 2013, 18:00 IST

Flickr / noahwesleyThe Bureau of Economic Analysis just published the February reading of personal income and spending, and the numbers were strong.

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Income climbed by 1.1 percent, which was higher than the 0.8 percent expected.

Spending rose by 0.7 percent, which was a tad higher than the 0.6 percent gain expected.

The personal savings rate rebounded to 2.6 percent from 2.2 percent in January.

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U.S. economic data has improved significantly in recent months, which is impressive considering the new payroll tax cuts, sequestration federal budget cuts, and uncertainty about what Washington may or may not cut next.

Last month's personal income and spending report revealed that the resilience in personal consumption was largely due to a drop in the personal savings rate (i.e. people spent more than they earned).

In a recent blog post titled "The Most Important US Economic Number Now," BlackRock's Russ Koesterich warns that falling savings rates is not sustainable. Here's an excerpt:

But investors wondering about the outlook going forward for the US economy will want to watch one economic number in particular: February’s personal income figure, which is scheduled for release on March 29th.

Why is this number so important? While consumer resilience to the tax increase can partly be attributed to a stronger labor market, lower savings and low interest rates have also cushioned consumption. For instance, the US personal savings rate has been heading lower for most of the past four years and it plunged to 2.4% in January, the lowest level since late 2007.

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But neither low interest rates nor low savings are likely to prove sustainable over the long term. The Federal Reserve is likely to eventually raise rates and without faster personal income growth, consumers are likely to run out of savings, especially considering the massive amount of debt they are still unwinding.

In other words, if consumption and the broader economy are to remain resilient going forward in the face of consumer deleveraging, they will need to be supported by an improving labor market leading to faster personal income growth.

Koesterich warned that if we don't see a pickup in personal income, then the economy could hit a speed bump in the second quarter.

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