The fiscal stimulus increases consumer spending in the USA; benign inflation

WASHINGTON (Reuters) – US consumer spending increased more in seven months in January, as the government distributed more money for pandemic relief to low-income families and new COVID-19 infections fell, positioning the economy for further growth fast in the first quarter.

Despite the strong recovery in consumer spending reported by the Commerce Department on Friday, price pressures have been silenced. Inflation is being watched closely amid concerns over some quarters that President Joe Biden’s $ 1.9 trillion COVID-19 recovery package could cause the economy to overheat.

The plan, which is being considered by the United States Congress, would be added to a nearly $ 900 billion bailout package approved by the government in late December. Federal Reserve Chairman Jerome Powell played down fears of inflation, citing three decades of lower, more stable prices.

“Thanks to Washington, the economic outlook for the near future is positive,” said Sung Won Sohn, 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, increased 2.4% last month. This was the biggest gain since last June and ended consecutive monthly declines. Personal income increased 10%, the biggest increase since last April, when the government disbursed the first round of stimulus checks. Revenue grew 0.6% in December.

Graph: Personal consumption –

The recent stimulus package included checks for $ 600 for most low- and middle-income Americans. The package also extended a government-funded weekly unemployment benefit, as well as benefits for millions of people who do not qualify for the state’s unemployment programs, as well as those who have exhausted their six months of eligibility. These benefits expire in mid-March.

The consumer spending report added optimistic data this month on industrial production, building permits and home sales.

Consumers bought motor vehicles, recreational products, food and drinks. Spending on services such as accommodation in hotels and restaurants, as well as medical consultations, also increased.

Economists polled by Reuters had forecast a 2.5% recovery in consumer spending in January and a 9.5% acceleration in income.

US stocks were trading low. The dollar rose against a basket of currencies. US Treasury yields have fallen.

When adjusted for inflation, consumer spending increased 2% last month, after falling 0.8% in December. But robust consumer spending is attracting imports.

In a separate report on Friday, the Commerce Department said the trade deficit in goods widened 0.7% to $ 83.7 billion last month, with imports outpacing the increase in exports. The department also recorded a 0.6% drop in retail inventories, although inventories at wholesalers have increased 1.3%.

The obstacle to economic growth stemming from the widening trade deficit in goods and the slower pace of inventory accumulation is likely to be mitigated by strong consumer spending.

After this month’s series of solid reports, Morgan Stanley increased its first quarter gross domestic product growth estimate to an annualized rate of 8.1% from a pace of 7.3%. Growth forecasts for the quarter were boosted last week from as low as 2.3%. The economy grew at a rate of 4.1% in the fourth quarter.

There are indications that the huge White House stimulus package could be fully approved next month. He would send additional checks for $ 1,400 to eligible families and extend the government’s safety net to the unemployed.

Further gains in consumer spending are likely, although winter storms, which devastated Texas and other parts of the densely populated south of this month, may slow the momentum. Daily coronavirus cases and hospitalizations have dropped to the levels last seen before Thanksgiving and Christmas, while the rate of vaccination is increasing.

While a third University of Michigan report showed its consumer sentiment index dropping this month from January, a Conference Board survey this week showed an improvement in confidence among families.

Chart: consumer sentiment –

Inflation was benign last month. The personal consumption expenditure price index (PCE), excluding the volatile food and energy component, increased 0.3% after a similar gain in December. In the 12-month period up to January, the so-called PCE price index increased 1.5%, after advancing 1.4% in December.

The core of the PCE price index is the Fed’s preferred inflation measure for its 2% target, a flexible average.

Inflation –

Powell told lawmakers this week that the U.S. central bank would keep interest rates low and continue to inject money into the economy by buying bonds “at least at the current rate until we make substantial progress toward our goals (employment and inflation). “

There is a large gap in the labor market, with at least 19 million people on unemployment insurance.

Last month’s revenue was driven by a 52% increase in government transfers. It was also supported by a 0.7% increase in the wage bill. Excluding generous government income available to households after inflation fell 0.5%.

Part of the stimulus money sent to families was hidden, raising the savings rate from 13.4% in December to 20.5%.

“We expect an additional stimulus package approved in March to further increase the savings rate, adding a powerful wind in favor of the purchasing power that is growing among US households, ready to be deployed while the economy is reopening,” said Ellen Zentner, chief economist at Morgan Stanley in New York.