The fiscal stimulus triggers US consumer spending; benign inflation

WASHINGTON (Reuters) – US consumer spending rose the most in the last seven months of January, as the government distributed more pandemic aid money to low-income households and new COVID-19 infections fell. positioning the economy for faster growth in the first quarter.

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

The plan, being considered by the US Congress, would be a rescue package worth almost 900 billion dollars approved by the government at the end of December. Federal Reserve Chairman Jerome Powell has eased inflation fears by calling for three decades of lower and more 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 percent last month. It was the biggest gain since June last year and ended the two-month monthly declines. Personal income rose 10%, the highest increase since April last year, when the government paid the first round of incentive checks. Revenues rose 0.6% in December.

Chart: personal consumption –

The recent incentive package included $ 600 checks for most low-income and some 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 state unemployment programs, as well as for those who have exhausted six months of eligibility. These benefits expire in mid-March.

The consumer spending report added to this month’s optimistic data on production output, building permits and home sales.

Consumers bought cars, leisure goods, food and drink. Expenses for services such as hotel and restaurant accommodation, as well as doctor visits, have also increased.

Economists surveyed by Reuters had forecast consumer spending to return 2.5% in January and revenue to accelerate 9.5%.

Shares in the US were traded below. The dollar has risen against a basket of currencies. US Treasury yields have declined.

When adjusted for inflation, consumer spending rose 2% last month, after falling 0.8% in December. But solid consumer spending attracts imports.

In a separate report on Friday, the Commerce Department said the trade deficit in goods rose 0.7 percent to $ 83.7 billion last month, with imports outpacing an increase in exports. The department also reported a 0.6% drop in retail inventories, although wholesale inventories increased by 1.3%.

The slowdown in economic growth due to the widening trade deficit in goods and the slower pace of stockpiling will likely be mitigated by strong consumer spending.

Following solid reports this month, Morgan Stanley raised its estimate of gross domestic product growth in the first quarter at an annualized rate of 8.1% from a rate of 7.3%. Growth forecasts for the last quarter rose last week from a rate of up to 2.3%. The economy grew at a rate of 4.1% in the fourth quarter.

There are indications that the White House’s massive stimulus package could be fully approved next month. It would send an additional 1,400 checks to qualified households and expand the government’s safety net for the unemployed.

It is possible to continue to save on consumer spending, although winter storms, which wreaked havoc in Texas and other densely populated parts of the south this month, could slow the momentum. Daily coronavirus cases and hospitalizations have dropped to levels last seen before Thanksgiving and the Christmas holidays, while the pace of vaccination is rising.

While a third report from the University of Michigan showed that its consumer sentiment index fell this January, a Conference Board survey this week showed an improvement in household confidence.

Chart: Consumer sentiment –

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

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

Chart: Inflation –

This week, Powell told lawmakers that the U.S. central bank will keep interest rates low and continue to pump money into the economy through bond purchases “at least at the current rate until we make substantial progress toward our goals (employment.” and maximum inflation) ”.

There is a large weakness in the labor market, with at least 19 million people receiving unemployment benefits.

Last month’s revenue was boosted by a 52% increase in government transfers. It was also supported by a 0.7% increase in wages. Excluding government government disposable income after inflation, it fell by 0.5%.

Some of the incentive money sent to households was hidden, raising the savings rate to 20.5% from 13.4% in December.

“We expect an additional stimulus package adopted in March to increase the saving rate, adding to a strong wind of purchasing power that is building among American households, ready to be deployed as the economy reopens,” said Ellen Zentner, chief economist at Morgan Stanley in New York.