Bloomberg News

WASHINGTON - Personal income in January made its largest gain in three months, suggesting that consumers may be in a position to boost spending on goods and services in the months ahead.

Incomes rose 0.7%, compared with 0.3% in December, the Commerce Department said Monday. Spending grew 0.5% in January after rising 1.1% in December. The December gain - the largest since May 1998 - was previously reported as 0.8%. Both January increases were on par with analysts' expectations.

The report is "confirmation of how strong economic conditions continued early into the new year," said Kevin Flanagan, an economist at Morgan Stanley Dean Witter in New York.

He said that the report included the one-time cost-of-living adjustment the Commerce Department makes each January, "and that provides an extra lift. But that still does not mean that income growth wasn't on the strong side."

Consumer spending accounts for roughly two-thirds of the nation's output of goods and services. A surge late last year helped push growth of fourth-quarter gross domestic product to a 6.9% annual rate, the fastest pace in three and a half years.

That trend is continuing, Monday's report suggests.

Unemployment dropped in January to 4%, the lowest since 3.9% in January 1970, the Labor Department has reported. The economy added a larger-than-expected 387,000 jobs, and average hourly earnings rose 0.4% after increasing 0.3% in December. The share of the working-age population holding jobs reached a record 64.8%.

Abundant jobs, a rising stock market, and the absence of major Y2K-related computer problems helped lift consumer confidence in January to a 144.7 index reading, its highest ever.

Tax refunds may also have helped fuel spending. Refunds are 23.3% higher than they were at this point last year, as more taxpayers file state and federal returns electronically, the Internal Revenue Service said. Refunds grew to $43.2 billion through Feb. 18, from $35.05 billion a year earlier, the IRS said. The average refund was 6.1% bigger, at $1,893.

The IRS has credited the larger refunds to an increase in the tax credit for children under 17, to $500, from $400.

Disposable income, the money left over after taxes, grew 0.9% in January, compared with a 0.1% December increase. The 0.7% overall increase in incomes was paced by cost-of-living adjustments in Social Security and other federal benefit programs, pay raises for federal employees and the military, and subsidy payments to farmers. Without these payments, income would have risen 0.6%, the government said.

The Commerce Department also reported Monday that the U.S. savings rate rose to 1.4% in January, from a record-low 1% in December.

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