US consumer spending and incomes fall, but rebound is expected

Both consumer spending and personal incomes are expected to rebound in March as Americans receive stimulus cheques.

Consumer spending accounts for 70 percent of United States economic activity, and personal incomes are the fuel for that spending [File: Steven Senne/AP Photo]
Consumer spending accounts for 70 percent of United States economic activity, and personal incomes are the fuel for that spending [File: Steven Senne/AP Photo]

Consumers’ spending and personal incomes both fell sharply in February as severe winter storms disrupted shopping in many parts of the United States and as the government wrapped up distribution of $600 relief payments.

However, both are expected to rebound strongly this month as more people are vaccinated against the coronavirus – and as they are flush with a second round of pandemic aid, this time in larger, $1,400 individual payments.

Consumer spending fell one percent last month, the Commerce Department reported Friday, the biggest drop since last April when spending tumbled 12.4 percent as the country was broadsided by the global coronavirus pandemic.

Incomes fell a record 7.1 percent last month, a period when the government was completing the bulk of the $600 payments from December’s $900bn relief bill.

Temperatures are rising with the arrival of spring in the US, meaning consumers will be growing more active, and the Treasury Department reported this week that it had made 127 million payments totalling $325bn in the first two weeks after President Joe Biden had signed the latest economic support package totalling $1.9 trillion.

“With $1,400 stimulus cheques making their way into bank accounts, health conditions improving and weather warming up, US consumers look ready for a spring bloom,” said Gregory Daco, chief US economist at Oxford Economics.

Consumer spending, which is closely watched because it accounts for 70 percent of US economic activity, jumped 3.4 percent in January. Personal incomes, which provide the fuel for future spending, surged 10.1 percent the same month as the US doled out $600 cheques.

All the government support and ultra-low interest rate policies from the Federal Reserve have raised concerns that inflation could take off as the economy opens up. A price gauge tied to spending that is followed by Fed officials showed an increase of 1.6 percent over the 12 months ending in February, up from a 1.4 percent gain in January.

However, much of that increase reflected rising energy costs. Core inflation, by this measure, was up 1.4 percent for the 12 months ending in February, down from a 1.5 percent gain in January. The inflation readings remain below the Fed’s 2 percent target for annual price increases, and Fed Chairman Jerome Powell repeated this week that any rise in inflation this year should be temporary.

In addition to the boost from another round of stimulus cheques, economists believe spending will be supported this year by the buildup in household savings over the past year as consumers stayed away from restaurants and cancelled vacations. The government reported that personal savings totalled a sizable $2.41 trillion with the saving rate – saving as a percentage of after-tax income – at 13.6 percent.

The overall economy, as measured by the gross domestic product, grew at an annual rate of 4.3 percent in the fourth quarter, capping a year when gross domestic product (GDP) plunged by 3.5 percent, the biggest annual setback in more than seven decades.

Mark Zandi, chief economist at Moody’s Analytics, said he expects GDP, fuelled by strong consumer spending, will grow at an annual 5.1 percent this quarter followed by quarterly growth rates continuing to rise for the rest of the year, giving the economy 6 percent growth for all of 2021, the strongest performance in 37 years.

“It will be a boom year,” Zandi said. “The economy will be helped by an end to the pandemic which will make people feel comfortable about going out, along with massive support from the federal government and pent-up demand from consumers.”

Source: AP

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