WASHINGTON (AP) – U.S. consumers, who withdrew from months of cuts, increased their spending a solid 2.4% in January, the strongest increase in seven months and a sign that the economy could be on the verge of maintaining a recovery from the pandemic recession.
The Commerce Department’s Friday report also showed that personal income, which provides fuel for spending, rose 10 percent last month, the biggest gain in nine months, driven by cash payments than most of the Americans received from the government.
The January spending rise followed two consecutive monthly spending falls that had raised concerns that consumers, who dominate most of the economy, were dazed, too eager to travel, buy and spend. Last month’s strong gains suggest many people are more confident in spending, especially after receiving $ 600 checks that were earmarked for most adults last month on a federal financial aid package.
“The economy weakened late last year as fiscal support faded and the pandemic intensified, but now it looks like it will come back 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 just 1.5% in the last 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 saved money for several months instead of spending. This could bode well for the economy later this year, as consumers become increasingly willing to spend, vaccines are administered more widely and some version of the proposed proposal is enacted. $ 1.9 trillion in financial aid from President Joe Biden, which includes additional cash payments for individuals.
Concern that a strengthened economy will accelerate inflation has led to an increase in bond yields. On Thursday, the yield on the ten-year U.S. Treasury bill was above 1.5%, a level not seen in more than a year and well above 0.92% in what was negotiated just two months ago.
That move sparked alarms on Wall Street and ignited a deep sell in the stock market. Some investors fear that rising interest rates and the threat of inflation could lead the Fed to raise the short-term benchmark rate too quickly and potentially derail the economy. The gentle inflation figure in the government’s Friday report shows that, at least so far, price increases are mostly mild.
Speaking to Congress this week, Fed Chairman Jerome Powell downplayed the risk of inflation and stressed the struggles of the economy. Dismissals are still high. And there are still ten million jobs lost by the pandemic that erupted almost a year ago. This is a deeper job loss than the one caused by the Great Recession of 2008-2009.
However, despite the weakened labor market, key sectors of the economy are showing signs of recovery as vaccinations increase and bailout aid makes its way into the economy. The Fed’s ultra-low rate policy also provides significant support.
Retail sales rose last month. Factory production also increased and has almost recovered to pre-pandemic levels. And sales of newly built homes jumped in January.
Friday’s report showed consumers increased their purchases of durable goods (from cars to appliances) by 8.4% last month. The increase was led by spending on cars, appliances and recreational items. Spending on non-durable goods rose 4.3%, with strong increases in demand for clothing and food.
By contrast, overall spending on services, which has been hurt for months by the reluctance of many consumers to venture out, rose just 0.7%. But the weakness is reflected in part in a fall in spending on utilities. More encouraging was that spending on restaurants and hotels rose 5.7%. New gains are likely to occur in the coming months if viral cases continue to fall and vaccines are given more widely.
Consumers saved a significant portion of their income last month: the personal savings rate went from 20.4% to 13.4% in December. It was the highest savings rate since May last year after the pandemic eruption. With so many Americans giving up out-of-town travel, shopping trips, and indoor dining, the savings rate has been rising, contributing to expectations of an increase in spending once again people feel comfortable resuming her previous spending habits.
Gregory Daco, chief economist at Oxford Economics, said he believes the high savings rate, combined with accumulated consumer demand and increased federal aid, will raise economic growth this year to 7%. This would be the strongest natural year growth since 1984.
“An economic shift can be maintained with improved health status and more stimulus,” Daco said. “The combination of a healthier economy and more government stimulus should generate a strong rebound in the middle of the year.”