WASHINGTON (AP) – Recovering from months of austerity, US consumers increased spending by a solid 2.4% in January, the sharpest increase in seven months and a sign that the economy is poised to rebound from support the pandemic recession.
Friday’s report from the Department of Commerce also found that personal income, which fuels spending, was up 10% last month, the biggest gain in nine months, boosted by cash payments most Americans made from the US. government.
The January spending surge followed two consecutive monthly spending declines that had raised concerns that the consumers, who power most of the economy, were on their knees and too eager to travel, shop, and splurge. Last month’s surge suggests that many people are becoming more confident about their spending, especially after receiving checks for $ 600 that went to most adults in a federal economic aid package last month.
“The economy weakened late last year as fiscal support dropped and the pandemic intensified, but now it appears to be coming back to life,” said Mark Zandi, chief economist at Moody’s Analytics.
The government also reported on Friday that, by a measure favored by the Federal Reserve, inflation rose a moderate 0.3% in January. As a result, prices have stayed up just 1.5% over the past 12 months, well below the Fed’s 2% target.
In addition to receiving cash payments, many Americans who have managed to keep their jobs have also been saving money for months instead of spending money. That could bode well for the economy later this year, as consumers become increasingly willing to spend, vaccinations become more widespread, and a $ 1.9 trillion version of President Joe Biden’s proposal for economic aid. , which includes additional cash payments for individuals.
Concerns that an improving economy will accelerate inflation has pushed bond yields up. On Thursday, the yield on the 10-year US Treasury note rose above 1.5% – a level not seen for over a year and well above the 0.92% it traded just two months ago.
That move caused alarm on Wall Street and triggered a deep sell-off in the stock market. Some investors fear that rising interest rates and the threat of inflation could cause the Fed to raise its benchmark too quickly in the short term and potentially derail the economy. The moderate inflation rate in Friday’s government report shows that price increases have been mostly mild so far.
In testimony to Congress this week, Fed Chairman Jerome Powell downplayed the risk of inflation and instead underlined the struggles of the economy. The number of redundancies is still high. And 10 million more jobs are still lost in the pandemic that broke out nearly a year ago. That is a deeper job loss than caused by the Great Recession of 2008-2009.
Still, despite the weakened labor market, key sectors of the economy are showing signs of recovery as vaccinations increase and government rescue aid makes its way through the economy. The Fed’s ultra-low interest rate policy also provides significant support.
Retail sales soared last month. Factory production has also risen, nearing pre-pandemic levels. And sales of new construction homes rose in January.
Friday’s report found that consumers increased their purchases of durable goods – from cars to appliances – by 8.4% last month. The increase was caused by spending on cars, household appliances and recreational goods. Expenditure on non-durable goods was up 4.3%, with demand for clothing and food booming.
In contrast, total spending on services, hurt for months by many consumers’ reluctance to leave their homes, rose by only a modest 0.7%. But the weakness partly reflected a decline in utilities spending. More encouragingly, spending on restaurants and hotels was up 5.7%. Further gains are likely in the coming months as viral cases continue to decline and vaccines are more widely administered.
Consumers saved a significant portion of their income last month: the personal savings rate jumped from 13.4% in December to 20.5%. It was the highest savings rate since May last year in the wake of a pandemic eruption. With so many Americans forgoing out-of-town travel, shopping, and indoor dining, the savings rate has risen, adding to expectations for a rise in spending once people feel comfortable resuming their previous spending habits .
Gregory Daco, chief economist at Oxford Economics, said he thinks the high savings rate, coupled with pent-up consumer demand and further federal aid, will boost economic growth to 7% this year. That would be the strongest growth in the calendar year since 1984.
“An economic launch can be sustained with an improving health situation and more incentives,” said Daco. “The combination of a healthier economy and more government stimulus measures should ensure a strong recovery by mid-year.”