WASHINGTON (AP) – Returning to months of cuts, US consumers boosted spending by 2.4% in January, the strongest growth in seven months and a sign that the economy may be ready to sustain a recovery from the pandemic recession .
Friday’s report from the Commerce Department also showed that personal incomes, which provide fuel for spending, rose 10 percent last month, the biggest gain in nine months, boosted by cash payments most Americans make. -they received from the government.
The increase in spending in January was followed by two consecutive monthly spending cuts, which raised concerns that consumers, who run most of the economy, were quiet, too eager to travel, buy and spend. Last month’s sharp gain suggests that many people are increasingly confident about spending, especially after receiving $ 600 checks that were paid to most adults last month in a federal economic aid package.
“The economy weakened late last year as fiscal support disappeared and the pandemic intensified, but now it seems to be coming 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 by a moderate 0.3% in January. This has allowed prices to rise by just 1.5% in the last 12 months, well below the Fed’s 2% target.
In addition to receiving cash payments, many Americans who managed to keep their jobs saved money for several months, rather than spending. This could bode well for the economy by the end of this year, as consumers feel more and more willing to spend, vaccinations are administered more widely and a version of President Joe Biden’s economic aid proposal is adopted. of $ 1.9 trillion, which includes additional cash payments for individuals.
Concerns that a strengthened economy will accelerate inflation have led to rising bond yields. On Thursday, the yield on the US Treasury’s 10-year government bond rose by more than 1.5% – a level not seen in more than a year and well over 0.92% at which it traded just two months ago.
This move triggered alarms on Wall Street and triggered a deep sell in the stock market. Some investors fear that rising interest rates and the threat of inflation could cause the Fed to raise its short-term reference rate too quickly and derail the economy. The mild inflation figure in the government’s report on Friday shows that, at least so far, price increases are largely slight.
In his testimony to Congress this week, Fed Chairman Jerome Powell downplayed the risk of inflation and instead highlighted the struggles of the economy. The layoffs are still big. And 10 million jobs remain lost in the pandemic that erupted almost a year ago. This is a deeper job loss than the 2008-2009 Great Recession.
However, despite the weakened labor market, key sectors of the economy are showing signs of growing as vaccinations increase and government rescue aid works in the economy. The Fed’s ultra-low rate policy also provides important support.
Retail sales have risen in the past month. Also, factory production has increased and almost regained its pre-pandemic levels. And sales of newly built homes rose in January.
Friday’s report showed that consumers increased their purchases of durable goods – from cars to appliances – by 8.4% last month. The increase was driven by spending on cars, appliances and leisure goods. Expenditure on non-durable goods increased by 4.3%, with strong increases in demand for clothing and food.
In contrast, general spending on services, which has been affected for months by the reluctance of many consumers to venture out of their homes, rose by only 0.7%. But the weakness partly reflected a decline in utility spending. More encouraging was that spending on restaurants and hotels increased by 5.7%. Other gains may occur in the coming months if viral cases continue to decline and vaccines are given more widely.
Consumers saved a significant share of their income last month: the personal savings rate rose to 20.5% from 13.4% in December. It was the highest savings rate since May last year, following the eruption of the pandemic. With so many Americans giving up out-of-town travel, shopping, and dining indoors, the savings rate has risen, contributing to expectations of rising spending once people feel comfortable resuming their spending habits. .
Gregory Daco, chief economist at Oxford Economics, said he believes the high savings rate, combined with accumulated consumer demand and additional federal aid, will bring economic growth to 7% this year. This would be the strongest increase in the 1984 calendar year.
“An economic downturn can be sustained by improved health and more stimulus,” Daco said. “The combination of a healthier economy and more government stimulus should lead to a strong recovery by mid-year.”