High gas prices drain U.S. spending power

Americans are earning and spending more, but a lot of the extra money is going into their gas tanks. Gas prices have drained more than half the extra cash Americans are getting from a cut in Social Security taxes.

Unlike some other kinds of spending, paying more for gas doesn't help the economy much. Most of the money goes overseas, and higher prices leave people with less money to buy appliances, computers, plane tickets and other things that can be postponed.

"When food and gasoline prices are rising, it causes people to hunker down," said Chris G. Christopher Jr., senior economist at IHS Global Insight.

Consumer spending jumped 0.7 percent last month, and personal incomes rose 0.3 percent, the Commerce Department said yesterday. Both gains reflected the cut of two percentage points in the Social Security tax, raising take-home pay.

They also illustrated how higher gas prices are stressing household budgets. After adjusting for inflation, spending rose just 0.3 percent. After-tax incomes actually fell 0.1 percent.

The Social Security tax cut will give most households an additional $1,000 to $2,000 this year. In December, when President Barack Obama signed it into law, economists predicted higher take-home pay would lead to more spending and stronger economic growth. But gas prices have jumped more than 50 cents a gallon this year.

The big rise in spending and smaller increase in incomes pushed the household savings rate down to 5.8 percent of after-tax incomes last month. That compared with 6.1 percent in January.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said he doesn't expect food and energy prices to keep rising sharply.