Summary: US household spending is holding up

What the chart shows: The chart shows the % change in US personal income and expenditure in nominal terms in the most recent three months (January-March 2013) compared with the previous three months (October-December 2012)

Why is the chart important: In 2011 the US temporarily cut the employee payroll tax rate from 6.6% to 4.6%. In January 2013, this cut was reversed as part of the fiscal tightening. There were fears that this tax increase, equivalent to 1% of household disposable income, would lead to a sharp cut in consumption, potentially throwing the US economy back into recession. These fears were always exaggerated. The payroll tax cut did not lead to a spending boom, as households used the extra money to pay down debt faster. The increase could be – and was – met by drawing down savings somewhat. Although monthly income fluctuated over the year-end, this was due to pay-outs in December to avoid the tax hike. Averaging the past four months shows income remaining steady. This confirms the continued US recovery.