Consumer sales and personal income dropped sharply in February when extreme winter storms affected shopping in several areas of the country and the government finished delivery of $600 aid payments.
Both are expected to recover strongly this month as more people are immunized against the coronavirus – and as they receive a second round of pandemic assistance, this time in bigger, $1,400 individual payments.
Consumer spending dropped 1% last month, according to the Commerce Department, the largest decline since April of last year when the world was hit hard by the global coronavirus pandemic.
Income dropped by a whopping 7.1 percent last month, at which time the government was completing the remainder of the $600 transfers from December’s $900 billion relief program.
The arrival of spring in the United States means that shoppers will become more involved, and the Treasury Department announced this week that it has made 127 million payments totaling $325 billion in the first two weeks since President Joe Biden signed the new economic stimulus plan of $1.9 trillion.
“With $1,400 stimulus checks landing in bank accounts, health outcomes strengthening, and weather warming up, US customers seem primed for a spring bloom,” said Gregory Daco, chief US economist at Oxford Economics.
Consumer spending, which accounts for 70 percent of US economic activity, increased by 3.4 percent in January. Personal revenue, which fuels future consumption, increased by 10.1 percent in the same month that the US issued $600 checks.
All of the government assistance and the Federal Reserve’s ultra-low interest rate policies have sparked worries that inflation will soar as the economy opens up. A price gauge related to spending that Fed officials track shows a 1.6 percent rise over the 12 months ended in February, up from a 1.4 percent gain in January.
However, a significant majority of the rise was attributed to increasing electricity prices. This estimate of core inflation was up 1.4 percent in the 12 months ended in February, down from a 1.5 percent increase in January. Inflation readings continue to fall short of the Fed’s 2% goal for annual price rises, and Fed Chairman Jerome Powell reiterated this week that any surge in inflation this year could be temporary.
In addition to the lift from another round of stimulus payments, analysts expect that the accumulation of household savings over the previous year as shoppers avoided restaurants and canceled holidays would help to spend this year. According to the government, personal savings totaled $2.41 trillion, with the saving rate – saving as a percentage of after-tax income – standing at 13.6 percent.
The total economy, as calculated by GDP, expanded at an annual rate of 4.3 percent in the fourth quarter, capping a year in which GDP dropped by 3.5 percent, the greatest annual decline in more than seven decades.
According to Mark Zandi, chief economist at Moody’s Analytics, GDP will increase at an annual rate of 5.1 percent this year, with quarterly growth rates continuing to climb for the rest of the year, bringing the economy a total annual growth rate of 6 percent in 2021, the best result 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.”
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