U.S. Personal Income Up 10% in January, Spending Up 2.4%

U.S. household income jumped 10% in January as the government delivered stimulus payments to households and consumer spending rose briskly, priming the economy for a burst in growth this year.

The increase in income was the second largest on record, eclipsed only by last April’s gain when the federal government sent an initial round of pandemic-relief payments, the Commerce Department said Friday. Household income has risen 13% since February 2020, the month before the pandemic shut down large segments of the economy.

Spending rose 2.4% in January, the first gain in three months and the biggest jump since last summer. Households spent broadly on goods, particularly long-lasting big-ticket items. Spending on services also increased for the first time since last October.

Americans are now sitting on a historically large pile of cash. Their savings totaled $3.9 trillion last month, up from $1.4 trillion last February.

“The levels are off the charts,” Joseph Brusuelas, chief economist at RSM US LLP, said of the cash reserves. “You’re going to see the fuel for a pretty big consumer-led boom this year, which will spill into next.” He expects the economy to grow 6.5% or higher this year.

The growth in household income has been almost entirely due to federal pandemic-relief aid.

Under a $900 billion stimulus program, signed into law in late December, the federal government has been sending one-time cash payments of $600 to most households. It also has been paying jobless workers $300 a week on top of normal unemployment benefits. Meanwhile, job growth resumed in January after a drop in December. And higher-income households, unable to travel or dine out, have built up a high level of savings.

There will likely be more government money flowing into the economy soon.

The $1.9 trillion pandemic-relief bill set for a House vote on Friday and subsequent Senate consideration would authorize $1,400 per-person payments. That $422 billion piece of the plan could get paid to households quickly after President Biden signs it into law. The Internal Revenue Service has shown over the past year that it can get the bulk of the money into bank accounts within a week or two after enactment.

On top of that, the IRS will be sending the regular batch of refunds during the tax-filing season. Officials expect to issue the first large wave of refunds to low-income households in the first week of March.

Other pieces of the pandemic law under consideration in Congress would get paid out more gradually, including the $400-per-week supplement to unemployment insurance and monthly advance payments of the child tax credit that would start as soon as July.

Gross domestic product fell 3.5% in 2020 compared with 2019, the Commerce Department said Thursday. In a Wall Street Journal poll earlier this month, economists on average expected GDP to expand nearly 4.9% this year.

There are big risks that could undermine the economic recovery. While U.S. residents are receiving the vaccine, it is likely to take months for the country to reach herd immunity, medical experts say. Another resurgence in the virus could scare consumers and causes businesses to close or scale back. Even when the country does reach herd immunity, many consumers may remain fearful of venturing out in public, economists say.

Consumer spending is the biggest factor behind growth in the U.S. Spending soared in the summer, grew modestly in early fall and then fell the final two months of last year. The decline at the end of last year occurred as states and cities ordered businesses to shut or scale back again, as virus infections resurged, restricting consumers’ ability to spend. Also, the effects of an earlier stimulus bill passed at the outset of the coronavirus pandemic faded.

New virus infections have been declining, and several big states, including California and Texas, eased restrictions in recent weeks.

Scott Molloy, 45 years old, was laid off in August as a senior project manager for a real-estate developer in San Diego. He started his own consulting business, restoring some but not all of his income.

Like most Americans, he has cut back on spending during the pandemic, mostly by not going out to eat or traveling, saving $300 to $400 a month.

But last week, not long after California’s governor lifted dining restrictions, Mr. Molloy went out for burgers and beer with a friend at a pub near the ocean. And he has planned a trip for April to drive up to a second home in Oregon, visit relatives in San Francisco and visit friends in Lake Tahoe. He plans to fly back. “It will be a full-fledged vacation that I haven’t taken in over a year,” Mr. Molloy said.

Such spending will help the economy return to its pre-pandemic vigor, along with additional recovery in a labor market still digging out of the hole created by the pandemic. Consumer spending has held up well during the pandemic, as consumers shelled out more for goods, particularly long-lasting products such as cars, home appliances and items purchased online. Many people have also upgraded their homes.

The services side — restaurants, nail salons, gyms, airlines — however, continues to suffer. Services spending is expected to pick up this spring, as more people get vaccinated.

“People are going to travel more,” Lydia Boussour, senior economist at Oxford Economics says. “They’re going to go back to restaurants and bars, they’ll go back to the gym — all the things they basically were not able to do before the pandemic. This is where you will really see a burst in spending.”
Source: Dow Jones