U.S. consumers earned, spent more in January

American consumers earned a little more in January and spent most of the extra money.

The modest gains should keep the economy growing slowly. But they disappointed economists, who were expecting bigger increases after two months of strong hiring.

The U.S. Commerce Department said Thursday that consumer spending increased 0.2 per cent in January. That's better than December's reading of no change.

Americans' income rose 0.3 per cent, the second straight monthly increase.

A separate report from the Labor Department suggested February was another strong month for hiring. Weekly applications for unemployment benefits dipped last week to 351,000.

The figure matched a four-year low set three weeks ago, leading many economists to predict employers added more than 200,000 net jobs in February for the third straight month.

Still, even with more jobs in the economy, Americans are seeing little growth in after-tax income.

After paying taxes and adjusting for inflation, incomes actually dipped in January. That reflected a big increase in tax payments last month, partly because of the expiration of a tax credit.

At the same time, inflation-adjusted spending was flat for the third straight month. That was partly because of warmer weather, which allowed people to spend less to heat their homes.

"Stronger job creation is not generating more spending," said Jennifer Lee, an economist at BMO Capital Markets. She expects many economists will lower their forecasts for growth in the current quarter.

Hiring in December and January, rather than pay raises, helped boost income. That trend may fuel more consumer spending and support solid growth for the economy in coming months. Consumer spending accounts for 70 per cent of economic activity.

Economists are worried that Americans might cut back on spending if their paychecks don't increase this year.

Incomes were much higher in the second half of last year than previously thought, the Commerce Department said Wednesday. Still, even with the revision, after-tax incomes adjusted for inflation rose only 1.3 per cent in 2011. Except for the recession year of 2009, when incomes fell, that's the smallest annual growth in incomes since 1991.

Most economists expect growth should rise to 2.5 per cent this year. That would be healthy in most years but is modest coming after the worst recession since the Second World War.

The increase in income stems from more hiring, greater overtime and small pay gains. Employers added 243,000 jobs in January, the most in nine months. The unemployment rate has fallen for five straight months, to 8.3 per cent.

Manufacturing workers worked more overtime in January. And average hourly earnings rose 4 cents to $23.29 (U.S.), the Labor Department said earlier this month.