WASHINGTON (Reuters) – U.S. consumer spending increased the most in seven months in January as the government distributed more money for pandemic relief to low-income households and dropped new COVID-19 infections, accelerating the economy in the first quarter has grown.
Despite the strong downturn in consumer spending reported by the Department of Commerce on Friday, price pressure eased. Inflation is being closely watched amid concerns from some quarters that President Joe Biden’s proposed $ 1.9 billion COVID-19 recovery package could overheat the economy.
The plan, which is being considered by the US Congress, would be on top of a bailout package worth almost $ 900 billion, which was approved by the government at the end of December. Federal Reserve Chairman Jerome Powell has reduced fears of inflation, citing three decades of lower and stable prices.
“Thanks to Washington, the economic outlook is sunny in the near future,” 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 U.S. economic activity, rose 2.4% last month. It was the biggest gain since last June and put an end to monthly declines. Personal income rose by 10%, the largest increase since April last year when the government paid out the first round of stimulus tests. Revenue rose 0.6% in December.
Graphic: Personal consumption –
The recent incentive package included $ 600 checks for mostly low-income and some middle-income Americans. The package also extended a weekly government-funded unemployment subsidy, as well as benefits for millions of people who are not eligible for state unemployment programs, as well as those who have been eligible for their six months. These benefits expire in mid-March.
The Consumer Spending Report this month contributed to the optimal data on manufacturing production, building permits and home sales.
Consumers bought motor vehicles, leisure goods, food and drink. They also increased spending on services such as hotel accommodation and restaurants, as well as doctor visits.
Economists polled by Reuters predicted that consumer spending would rise by 2.5% in January and accelerate revenue by 9.5%.
US stocks traded lower. The dollar rose against a basket of currencies. U.S. Treasury yields fell.
Adjusted for inflation, consumer spending increased by 2% last month after falling by 0.8% in December. But robust consumer spending is pulling in imports.
In a separate report on Friday, the Department of Commerce said the trade deficit in goods rose 0.7% last month to $ 83.7 billion, with larger imports than imports. The department also reported a 0.6% decline in retail inventory, although inventory at wholesalers rose 1.3%.
The weakening of economic growth due to the growing shortage of goods and the slower accumulation of stocks is likely to be offset by strong consumer spending.
Following the numerous solid reports this month, Morgan Stanley increased its estimate of gross domestic product for the first quarter to an annual rate of 8.1% from a rate of 7.3%. Growth forecasts for the quarter were raised last week from as low as a rate of 2.3%. The economy grew at a rate of 4.1% in the fourth quarter.
There are indications that the White House’s huge stimulus package can be fully approved next month. It will send additional checks of $ 1400 to qualified households and expand the government’s safety net for the unemployed.
Further gains in consumer spending are likely, though the winter storms, which wreaked havoc in Texas and other parts of the densely populated South this month, could slow the momentum. Daily cases and hospitalizations in coronavirus have dropped to levels last seen before the Thanksgiving and Christmas holidays, while the vaccination rate is picking up.
While a third University of Michigan report showed that the consumer sentiment index fell this month from January, a survey by the Conference Council this week showed an improvement in household confidence.
Graph: Consumer sentiment –
Inflation was good last month. The price index for personal consumption expenditure (PCE), excluding the volatile food and energy component, rose by 0.3% after a similar rise in December. In the 12 months to January, the so-called core PCE price index rose by 1.5% after rising by 1.4% in December.
The core PCE price index is the Fed’s preferred inflation measure for its 2% target, a flexible average.
Graph: inflation –
Powell told lawmakers this week that the US Federal Reserve 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 significant progress towards our goals (maximum employment and inflation). ‘
There is a lot of slack in the labor market, with at least 19 million people having unemployment benefits.
Revenue last month was boosted by a 52% rise in government transfers. It was also supported by a 0.7% increase in wages. Excluding government revenue at the disposal of households, inflation fell by 0.5%.
Some of the stimulus money sent to households was hidden, raising the savings rate to 20.5% from 13.4% in December.
“We expect an additional stimulus package to be implemented in March to further increase the savings rate, which will increase a strong headwind of purchasing power that has built up among U.S. households, and is ready to be put into use as the economy recovers started, “said Ellen Zentner, chief economist, at Morgan Stanley in New York.
Reporting by Lucia Mutikani; Edited by Alex Richardson and Andrea Ricci