WASHINGTON (AP) – Recovering from months of contraction, American consumers increased their spending by a solid 2.4% in January, the biggest increase in seven months and a sign that the economy may be positioned to sustain a recovery from the recession. pandemic.
Friday’s Commerce Department report also showed that personal income, which provides fuel for spending, increased 10% last month, the biggest gain in nine months, driven by cash payments that most Americans received from the government.
The increase in spending in January followed two consecutive declines in monthly spending that raised concerns that consumers, who drive most of the economy, were squatting, too eager to travel, shop and spend. Last month’s huge gain suggests that many people are becoming more confident about spending, especially after receiving checks for $ 600 that went to most adults last month in a federal financial aid package.
“The economy weakened at the end of last year with the weakening of fiscal support and the intensification of the pandemic, 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 moderately 0.3% in January. This left prices up just 1.5% in the past 12 months, well below the Fed’s 2% target.
In addition to receiving cash payments, many Americans who managed to keep their jobs have also been saving money for several months, instead of spending them. This may bode well for the economy later this year, as consumers feel more and more willing to spend, vaccines are more widely administered and some version of the $ 1.9 trillion economic aid proposal from the President Joe Biden, which includes additional cash payments to individuals, is enacted.
Concerns that the strengthening of the economy will accelerate inflation have caused bond yields to skyrocket. 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% that was traded just two months ago.
This move raised alarms on Wall Street and triggered a strong sale of shares on the stock market. Some investors fear that rising interest rates and the threat of inflation could lead the Fed to raise its short-term base rate too quickly and potentially damage the economy. Moderate inflation data in Friday’s government report shows that, at least so far, price increases are mostly moderate.
In testimony to Congress this week, Fed Chairman Jerome Powell minimized the risk of inflation and instead highlighted the economic difficulties. Layoffs are still high. And 10 million jobs remain lost to the pandemic that broke out almost a year ago. It is a deeper job loss than that inflicted by the 2008-2009 Great Recession.
Still, despite the weakening labor market, key sectors of the economy are showing signs of recovery as vaccinations increase and government rescue aid is paving the way for the economy. The Fed’s ultra-low rate policy is also providing important support.
Retail sales soared last month. The factory’s production also increased and almost recovered levels prior to the pandemic. And sales of newly built homes increased in January.
Friday’s report showed that consumers increased their purchases of durable goods – from automobiles to appliances – by 8.4% last month. The increase was led by spending on automobiles, appliances and recreational items. Spending on non-durable goods grew 4.3%, with solid gains in demand for clothing and food.
On the other hand, general spending on services, hampered for months by the reluctance of many consumers to venture out of the home, increased by only a modest 0.7%. But the weakness partly reflected a drop in spending on public services. More encouraging was that spending on restaurants and hotels increased by 5.7%. Additional gains are likely in the coming months if viral cases continue to decline and vaccines are administered more widely.
Consumers saved a significant part of their income last month: the personal savings rate jumped from 13.4% to 20.5% in December. It was the highest savings rate since May last year, after the pandemic erupted. With so many Americans renouncing out-of-town trips, shopping trips and indoor meals, the savings rate has gone up, contributing to expectations of an increase in spending once people feel comfortable resuming their spending. previous consumption habits.
Gregory Daco, chief economist at Oxford Economics, said he believed the high savings rate, combined with pent-up consumer demand and more federal aid, would bring economic growth this year to 7%. That would be the biggest growth for the calendar year since 1984.
“An economic boost can be sustained with an improvement in the health situation and more stimuli,” said Daco. “The combination of a healthier economy and more government stimulus is expected to generate a strong recovery by mid-year.”