Bouncing back from months of retrenchment, America’s consumers stepped up their spending by a solid 2.4% in January, the sharpest increase in seven months and a sign that the economy may be poised to sustain a recovery from the pandemic recession.
Friday’s report from the Commerce Department also showed that personal incomes, which provide the fuel for spending, jumped 10% last month, the biggest gain in nine months, boosted by cash payments that most Americans received from the government.
The January spending increase followed two straight monthly spending drops that had raised concerns that consumers, who power most of the economy, were hunkered down, too anxious to travel, shop and spend. Last month’s sharp gain suggests that many people are growing more confident about spending, especially after receiving $600 checks that went to most adults last month in a federal economic aid package.
“The economy weakened late last year as the fiscal support faded and the pandemic intensified, but now it seems to be coming back to life,” said Mark Zandi, chief economist at Moody’s Analytics.
The government also reported Friday that inflation by a measure preferred by the Federal Reserve rose a moderate 0.3% in January. That left prices up just 1.5% over the past 12 months, well below the Fed’s 2% target.
Impact on the Economy
Besides receiving cash payments, many Americans who have managed to keep their jobs have also been saving money for several months rather than spending. That could bode well for the economy later this year, once consumers increasingly feel willing to spend, vaccinations are more widely administered and some version of President Joe Biden’s $1.9 trillion economic aid proposal, which includes additional cash payments for individuals, is enacted.
Concerns that a strengthening economy will accelerate inflation have sent bond yields surging. On Thursday, the yield on the 10-year U.S. Treasury note moved above 1.5% — a level not seen in more than a year and far above the 0.92% it was trading at only two months ago.
That move raised alarms on Wall Street and ignited a deep selloff in the stock market. Some investors fear that rising interest rates and the threat of inflation might lead the Fed to raise its benchmark short-term rate too quickly and potentially derail the economy. The tame inflation figure in Friday’s report from the government shows that, so far at least, price increases are mostly mild.
In testimony to Congress this week, Fed Chair Jerome Powell downplayed the inflation risk and instead underscored the economy’s struggles. Layoffs are still high. And 10 million jobs remain lost to the pandemic that erupted nearly a year ago. That’s a deeper job loss than was inflicted by the Great Recession of 2008-2009.
Still, despite the weakened job market, key sectors of the economy are showing signs of picking up as vaccinations increase and government rescue aid works its way through the economy. The Fed’s ultra-low-rate policy is providing important support as well.
Retail sales soared last month. Factory output also rose and has nearly regained its pre-pandemic levels. And sales of newly built homes jumped in January.
Friday’s report showed that consumers boosted their purchases of durable goods — from autos to appliances — by 8.4% last month. The increase was led by spending on autos, household appliances and recreational goods. Spending on non-durable goods rose 4.3%, with solid gains in demand for clothing and food.
By contrast, overall spending on services, which has been hurt for months by the reluctance of many consumers to venture out of their homes, rose just a modest 0.7%. But the weakness reflected in part a drop in spending on utilities. More encouraging was that spending on restaurants and hotels rose 5.7%. Further gains are likely in coming months if viral cases keep falling and vaccines are more widely administered.
Consumers saved a significant chunk of their income last month: The personal savings rate jumped to 20.5% from 13.4% in December. It was the highest savings rate since May of last year in the aftermath of pandemic’s eruption. With so many Americans forgoing out-of-town travel, shopping trips and indoor dining, the savings rate has been climbing, contributing to expectations for a surge in spending once more people feel comfortable resuming their previous spending habits.
Gregory Daco, chief economist at Oxford Economics, said he thinks the high savings rate, combined with pent-up consumer demand and further federal aid, will lift economic growth this year to 7%. That would be the strongest calendar year growth since 1984.
“An economic lift-off can be sustained with an improving health situation and more stimulus,” Daco said. “The combination of a healthier economy and more government stimulus should generate a strong rebound by the middle of the year.”
Read the full article on the Associated Press website here.