Personal income tanked in the month of January while spending maintained a narrow 0.2% gain. Today’s report from the Commerce Department showed that income was down b a whopping 3.6% as higher tax rates kicked in. Dow Jones was calling for a drop of 2.5% in income and Bloomberg was calling for a drop of only 2.1%. This was the largest one-month drop that most workers have seen in their careers.

What lies ahead is the key question. Consumers may continue to dribble off on their spending, and the income drop should start to normalize in the months ahead. The dilemma is that if spending remains higher when take-home pay is lower, then that means you can kiss any broad savings goodbye. As proof, the personal savings rate fell to 2.4% in January from 6.4% in December.

If you consider the PCE inflation component, spending would have been up only 0.1% in January. We already have seen large retail outfits confirm and warn that lower take-home pay is starting to be felt, and the delay in tax refunds is being felt as well.

Keep in mind that January was just the first month of the payroll tax. It is going to take several months for this normalize before we know the real level of income, spending and savings. All politics aside, increasing taxes too much will have a negative impact somewhere.

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