Americans are earning and spending more, but a lot of the extra money is going down their gas tanks. Gas prices have drained more than half the extra cash Americans are getting this year 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 Monday. 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. In late December, they hit $3 a gallon for the first time in two years. Last week, they averaged $3.58 nationwide, according to AAA's daily fuel gauge survey.
Mark Zandi, chief economist at Moody's Analytics, has reduced his forecast for 2011 economic growth from 3.9 percent to 3.5 percent, in part because of gas prices. That would still be better than last year's 2.9 percent growth and the biggest expansion since before the recession.
Still, much of the anticipated benefit from the tax cut will be lost. Christopher estimates half to two-thirds of the extra cash will ultimately go toward higher gas prices. Food prices have also risen in recent months, he noted.
Higher gas prices generally don't help the broader U.S. economy, even though they force people to spend more. The additional money seldom pays for higher salaries or new jobs. The United States does supply a portion of the oil consumed here. But the majority is produced overseas, so most of the money leaves the country.
Most people don't have the luxury of deciding to buy less fuel. They have to get to work. So they spend more on gas, and less on other goods and services - from household purchases to restaurant meals to vacations - that do more to drive U.S. economic growth.
Those purchasing decisions are critical for the economy because consumer spending accounts for 70 percent of growth.
There's also a psychological factor when gas prices, a consumer necessity, keep rising. Those higher prices tend to rattle consumer confidence. People feel poorer, and they're less likely to spend freely.
Ultimately, less spending can hurt job growth because businesses will feel less confident. Christopher said a rise of just 25 cents a gallon in gasoline prices, if it persisted for an entire year, could cost the economy 270,000 jobs.