Despite Personal Income Consistently Going Up, Spending is Down

During May of this year, the average American’s personal income rose by 0.4%. Your first inclination might be to say, “Big deal.” However, May marks the fifth month in a row in which there was an increase in personal income. In addition, personal incomes are now rising faster than the rate of inflation.

Further hammering home this point is the fact that when you account for both inflation and taxes, personal income is up 1.9% from this time one year ago. More disposable income should mean more spending, which is ultimately good for the economy.

But an interesting thing is happening: Americans seem to be more reluctant to spend these newly found funds, and are actually saving some of this income for a rainy day. Here’s the proof: after taking mildly higher prices into consideration, consumer spending has actually decreased for two consecutive months. With the exceptions of fuel, housing and cars, this is the case almost all across the board in all industries.

Overall, as of May, the average American was saving 4.8% of his income. While this sounds good – especially when compared to the pre-recession rates of less than 3%, this number is not nearly where it should be. Consider the early 1970s, when savings rates were 12% to 14% … quite a difference! Even during the height of the recession, Americans became more cautious and saved about 6%.

Federal Reserve Chair, Janet Yelen, predicts this positive trend (of income being higher than inflation) to continue throughout the rest of this year – which she says will eventually result in increased spending and a subsequent economic boost.

With all that said, there are also a handful of experts who believe Americans aren’t spending more because they just don’t have it to spend – that the extra funds are being used to cover everyday expenses.