Fiscal stimulus burns the cost of U.S. consumers; inflation inflation

WASHINGTON (Reuters) – U.S. consumer spending rose sharply in seven months in January as the government issued more pandemic relief money to low-income families and new COVID- infections fell 19, setting the economy for faster growth in the first quarter.

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

The plan, which is being considered by the U.S. Congress, would be on top of a nearly $ 900 billion bailout package agreed by the government at the end of December. Federal Reserve Chairman Jerome Powell has been reducing fears of inflation, citing three decades of lower and more stable prices.

“Thanks to Washington, the economic situation is soon sunny,” 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, jumped 2.4% last month. That was the biggest gain since June last year and ended in a bi-directional monthly decline. Personal income rose 10%, the biggest increase since last April when the government launched its first round of incentive checks. Revenue rose 0.6% in December.

Graphic: Personal wear –

The recent incentive package included $ 600 surveys for low-income Americans and some middle-income Americans. The package also expanded a government-funded weekly unemployment subsidy as well as benefits for millions of people who are not eligible for state unemployment programs in addition to those who have spent their six months of eligibility. These benefits will end in mid-March.

The consumer spending report added positive data this month on manufacturing output, building permits and home sales.

Customers bought motor vehicles, leisure goods, food and beverages. They also boosted spending on services such as hotel and restaurant accommodation, as well as GP visits.

Economists surveyed by Reuters had forecast consumer spending falling 2.5% in January and revenues accelerating 9.5%.

U.S. stocks traded lower. The dollar rose against a basket of currencies. The U.S. Treasury yield fell.

When adjusted for inflation, consumer spending increased 2% last month after declining 0.8% in December. But strong consumer spending attracts imports.

In a separate report on Friday, the Commerce Department said commodity trade deficits grew 0.7% to $ 83.7 billion last month, with imports offset by an increase in exports. The sector also reported a 0.6% decline in retail investments, although wholesalers’ stocks rose 1.3%.

The slowdown in economic growth is likely due to the widening trade deficit and slower pace of investment accumulation compounded by strong consumer spending.

After the loss of hard reports this month, Morgan Stanley raised its gross domestic product growth estimate in the first quarter to an annual rate of 8.1% from a pace of 7.3%. Growth projections for the quarter rose last week from as low as 2.3%. The economy grew by 4.1% in the fourth quarter.

It looks like the White House’s big stimulus package could be fully approved next month. It would send an extra $ 1,400 checks to certified households and extend the government safety net for the unemployed.

There are likely to be more gains in consumer spending, although winter storms, which wreaked havoc in Texas and elsewhere in the densely populated population this month, could delay it. Daily coronavirus cases and hospitals have fallen to levels last seen before the Thanksgiving and Christmas holidays, while the pace of vaccination is rising.

While a third report from the University of Michigan showed a consumer sentiment index picking up this month from January, a study from the Conference Board this week showed that confidence among households has improved.

Graphic: Consumer Awareness –

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

PCE’s main price chart is Fed’s preferred inflation measure for its 2% target, flexible average.

Graphic: Inflation –

Powell this week told lawyers that the U.S. central bank would keep interest rates low and continue to pump money into the economy through the purchase of bonds “at least at the pace. so that we can make further progress towards our goals (maximum employment and inflation). ”

The labor market is plentiful, with at least 19 million people on unemployment benefits.

Last month’s revenue was boosted by a 52% rise in government moves. It was also supported by a 0.7% increase in salary. Excluding government largesse income available from households after inflation fell 0.5%.

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

“We expect an additional stimulus package in March to increase the level of savings, adding to the powerful tailoring of purchasing power that has been building among U.S. homes, ready for use as a the economy is reopening, ”said Ellen Zentner, chief economist at Morgan Stanley in New York.