WASHINGTON (Reuters) – US consumer spending rose the most in seven months in January, as the government distributed more pandemic emergency money to low-income households and new COVID-19 infections declined, enabling faster growth in the economy in the first quarter made.
Despite the strong recovery in consumer spending reported by the Department of Commerce on Friday, price pressures have been moderate. Inflation is being watched closely amid concerns from some quarters that President Joe Biden’s proposed $ 1.9 trillion COVID-19 recovery package could overheat the economy.
The plan, under consideration by the US Congress, comes in addition to a bailout package worth nearly $ 900 billion approved by the government in late December. Federal Reserve Chairman Jerome Powell has mitigated inflation fears, citing three decades of lower and stable prices.
“Thanks to Washington, the economic outlook for the near future is bright,” said Sung Won Sohn, a professor of finance and economics at Loyola Marymount University in Los Angeles.
Consumer spending, which accounts for more than two-thirds of US economic activity, rose 2.4% last month. That was the biggest gain since June last year, ending two consecutive monthly declines. Personal income shot up 10%, the largest increase since April last year, when the government paid out the first round of stimulus checks. Revenues were up 0.6% in December.
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The recent stimulus package included checks for $ 600 for mostly low- and some middle-income Americans. The package also included a government-funded weekly unemployment subsidy and benefits for millions of people who are ineligible for state unemployment programs and those who have exhausted the six months of eligibility. These benefits expire in mid-March.
The consumer spending report this month added positive data on manufacturing, building permits and home sales.
Consumers bought cars, recreational goods, food and drinks. They also increased spending on services such as hotel accommodations and restaurants, as well as doctor visits.
Economists polled by Reuters had forecast that consumer spending would pick up 2.5% in January and revenues by 9.5%.
US stocks traded lower. The dollar rose against a basket of currencies. Interest on US Treasuries fell.
Adjusted for inflation, consumer spending rose 2% last month after falling 0.8% in December. But robust consumer spending is pulling on imports.
In a separate report on Friday, the Commerce Department said the merchandise trade deficit rose 0.7% last month to $ 83.7 billion, with imports outstripping exports. The division also reported a 0.6% decline in retail inventories, although wholesale inventories increased 1.3%.
The drag on economic growth from the widening commodity trade deficit and slower pace of stock building are likely to be dampened by strong consumer spending.
After this month’s many solid reports, Morgan Stanley raised its estimate of gross domestic product growth in the first quarter from 7.3% to 8.1% year-on-year. Growth expectations for the quarter accelerated last week from a slow pace of 2.3%. The economy grew by 4.1% in the fourth quarter.
Evidence suggests that the massive White House stimulus package could be fully approved next month. It would send additional $ 1,400 checks to qualified households and expand the government’s safety net for the unemployed.
Further increases in consumer spending are likely, though winter storms that wreaked havoc in Texas and other parts of the densely populated South this month could slow momentum. Daily coronavirus cases and hospital admissions have fallen to levels last seen before the Thanksgiving and Christmas holidays, while the rate of vaccination is picking up.
While a third report from the University of Michigan showed that the consumer confidence index fell from January this month, a Conference Board survey this week showed an improvement in household confidence.
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Inflation was favorable last month. The price index for personal consumption expenditure (PCE) excluding the volatile food and energy component rose 0.3% after a similar increase in December. In the 12 months to January, the so-called core PCE price index rose 1.5%, after an increase of 1.4% in December.
PCE’s core price index is the Fed’s preferred measure of inflation for its 2% target, a flexible average.
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Powell told lawmakers this week that the U.S. central bank would keep interest rates low and continue pumping money into the economy through bond purchases “at least at the current pace until we make substantial further progress toward our goals (maximum employment). and inflation). “
There is plenty of room in the labor market, with at least 19 million people on unemployment benefits.
Revenues were boosted last month by a 52% increase in government transfers. It was also supported by a 0.7% increase in wages. Excluding the generous government income available to households after inflation has fallen by 0.5%.
Some of the stimulus money sent to households was put away, increasing the savings rate from 13.4% in December to 20.5%.
“We expect an additional stimulus package to be adopted in March to further boost the savings rate, adding to a strong back-up purchasing power built among US households ready to be deployed as the economy reopens,” said Ellen Zentner , chief economist. at Morgan Stanley in New York.
Reporting by Lucia Mutikani; Editing by Alex Richardson and Andrea Ricci