Americans Tightened Their Belts In January Despite Bigger Paychecks

Workers got bigger paychecks in January, but they were less inclined to spend them amid nervousness about the future of the economy. 

Personal income increased 0.9% in January, its biggest jump in a year, the Bureau of Economic Analysis said Friday. Meanwhile, personal spending decreased 0.2%, its biggest drop since February 2021. The income jump blew past the expectations of forecasters who had expected it to rise 0.4%, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. The spending drop likewise came as a surprise, bucking the median forecast for a 0.1% increase.

Should Americans’ newfound reluctance to shop prove a lasting trend, it would spell trouble for the economy because consumer spending is the main engine of U.S. economic growth, accounting for more than two-thirds of the gross domestic product.

The plunge may partly be explained by a drop in auto sales that surged in December, the impact of unusually cold weather, and the Los Angeles wildfires—all which discouraged spending, Sal Guatieri, senior economist at BMO Capital Markets, said in a commentary.

Consumers may also be nervous about the potential impact of tariffs President Donald Trump has promised to impose, which could push up prices, economists at Wells Fargo Securities said in a commentary. Recent surveys have indicated consumers are growing more worried about the impact of the tariffs on their household budgets.

Other longer-term factors dragging down spending are continued high interest rates on loans and the impact of pandemic-era price increases still hurting household budgets.

Still, the uptick in income, which was driven by increasing wages as well as the yearly Social Security Cost-of-Living adjustment, bodes well for future spending. That extra cash may be burning holes in pockets, especially in better-off households.

“Spending tends to follow income,” Robert Frick, corporate economist with Navy Federal Credit Union, said in a commentary. “If people have money, they usually spend it,”