According to the US Commerce Department, consumer spending for the month of January continued a climb:

Adjusted for inflation, real spending on goods increased 0.8%, while spending on services rose an anemic 0.1%, according to the Commerce Department’s estimates.

In current dollars, consumer spending rose 0.5% to a seasonally adjusted annual rate of $10.3 trillion for the first month of 2010.

The report was a “mixed bag,” said economists for Merrill Lynch, noting weak income growth.

“We need to see improvement in both the willingness and ability of consumers to spend,” said Jim Baird, chief investment strategist for Plante Moran Financial Advisors. “Unfortunately, constraints on credit availability and expectations for muted job creation present substantial headwinds to a resurgent consumer.”

If the government’s numbers are to be believed, consumers seem to be returning to stores, even though behemoths like Walmart reported lower retail sales numbers in the 4th quarter of 2009. If nothing else, this number is indicative that people still want to spend, but the problems we face are evident in the February declines in income:

After adjusting for inflation, after-tax incomes fell 0.6% on the month, mostly due to large non-withholding tax payments reflecting higher incomes from investments and bonuses in 2009. It was the largest decline in real disposable incomes since July, just after a one-time stimulus payment to seniors.

We spent more money on consumer goods, but we made less money.

So where did that money to spend come from? Savings, of course:

With spending rising faster than incomes, the personal savings rate fell to 3.3% of disposable income from 4.2% in December. It was the lowest savings rate since October 2008.

What we will eventually run into with consumer spending is a mathematical brick wall.

If personal incomes continue to decline, credit availability for consumers disappears and job losses mount, that savings rate will continue to fall towards 0.0%. Though savings will probably never go to 0%, it is clear that consumer spending cannot continue to rise indefinitely.

And because consumer spending is the machine responsible for 70% of our economic growth, when that number starts to decline, expect to see significant contractions in GDP.

We’d suggest that these negative declines and contractions will start being reflected in our economic numbers by the 3rd or 4th quarter of 2010, especially if we witness a serious economic catastrophe in Europe or the US real estate markets.