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WASHINGTON (AP) – Bouncing back from months of decline, U.S. consumers increased spending by a solid 2.4% in January, the biggest increase in seven months and a sign the economy could be on the verge of support a recovery from the pandemic recession.
Friday’s Commerce Department report also showed personal income, which drives spending, jumped 10% last month, the biggest gain in nine months, boosted by the cash payments most Americans have. received from the government.
January’s spending increase follows two consecutive monthly spending declines that raised concerns that consumers, who power most of the economy, were too anxious to travel, shop and spend. The sharp rise last month suggests many people are growing more confident about spending, especially after receiving $ 600 checks that went to most adults last month under a federal program. economic aid.
“The economy weakened at the end of last year as budget support waned and the pandemic intensified, but now it appears to be coming to life,” said Mark Zandi, chief economist at Moody’s Analytics.
The government also reported on Friday that inflation by a measure preferred by the Federal Reserve rose 0.3% in January. That left prices 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 were successful in keeping their jobs also saved money for several months rather than spending. This could bode well for the economy later this year, once consumers feel more willing to spend, vaccinations will be more widely administered and a version of the economic aid proposal of 1.9. President Joe Biden’s trillion dollars, which includes additional cash payments for individuals, will pass.
Fears that a stronger economy would accelerate inflation drove bond yields up. On Thursday, the yield on the 10-year US Treasury bill rose above 1.5% – a level not seen in more than a year and well above the 0.92% it was trading at ago only two months.
The move sounded alarm bells on Wall Street and triggered a sell off in the stock market. Some investors fear that rising interest rates and the threat of inflation will lead the Fed to raise its short-term benchmark rate too quickly and potentially derail the economy. The tame inflation figure in Friday’s government report shows that, so far at least, price increases have been mostly moderate.
In his testimony to Congress this week, Fed Chairman Jerome Powell downplayed the risk of inflation and instead highlighted the woes in the economy. Layoffs are still high. And 10 million jobs remain lost due to the pandemic that erupted almost a year ago. This is a deeper job loss than that inflicted by the Great Recession of 2008-2009.
Yet despite the weakening labor market, key sectors of the economy are showing signs of recovery as vaccinations increase and government bailout aid makes its way into the economy. The Fed’s ultra-low rate policy is also providing significant support.
Retail sales soared last month. Factory production has also increased and is almost back to pre-pandemic levels. And sales of newly constructed homes surged in January.
Friday’s report showed consumers had increased their purchases of durable goods – from automobiles to appliances – by 8.4% last month. The increase was mainly attributable to spending on automobiles, household appliances and recreational items. Spending on non-durable goods rose 4.3%, with demand for clothing and food rising sharply.
In contrast, overall spending on services, which has suffered for months from the reluctance of many consumers to leave their homes, rose only a modest 0.7%. But the weakness partly reflected lower spending on utilities. More encouragingly, spending at restaurants and hotels rose 5.7%. Further gains are likely in the coming months if viral cases continue to decline and vaccines are more widely administered.
Consumers saved a significant chunk of their income last month: the personal savings rate fell from 13.4% to 20.5% in December. It was the highest savings rate since May of last year following the outbreak of the pandemic. With so many Americans forgoing trips out of town, shopping, and eating indoors, the savings rate has risen, contributing to expectations of increased spending once again, people are feeling at comfortable resuming their previous spending habits.
Gregory Daco, chief economist at Oxford Economics, said he believed the high savings rate, combined with pent-up consumer demand and additional federal aid, would push economic growth this year to 7%. It would be the strongest growth of the calendar year since 1984.
“An economic take-off can be supported by better health and more stimulus,” Daco said. “The combination of a healthier economy and greater government stimulus should generate a strong rebound by the middle of the year.”
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