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U.S. Personal Income Up 10% in January, Spending Up 2.4% — 3rd Update

By Josh Mitchell 

Pandemic aid to households is pouring money into the U.S. economy, priming it for rapid growth this year.

Household income -- the amount Americans received from wages, investments and government programs -- rose 10% in January from the previous month, the Commerce Department said Friday. The increase 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. Household income has risen 13% since February 2020, the month before the pandemic shut down large segments of the economy.

January's increase in household income was almost entirely due to federal pandemic-relief aid included in a $900 billion stimulus program signed into law in late December. That package included one-time cash payments of $600 and a special weekly unemployment benefit of $300 that the government started sending to households.

There will likely be more government money flowing into the economy soon. The Democratic-led House on Friday was expected to narrowly pass a $1.9 trillion Covid-19 aid bill that would extend additional pandemic aid, including $1,400 per-person payments for many Americans. It would then go to the Senate, where Democrats hope to pass the package through a procedure that doesn't require votes from Republicans, who have attacked it as too large.

Americans last month spent a chunk of their income, boosting spending by 2.4%, the first gain in three months. Households spent broadly on goods, particularly long-lasting big-ticket items. Spending on services also increased for the first time since October.

But households also stashed much of the money: Household 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 more this year.

Job growth resumed in January after a drop in December, while some parts of the economy such as construction, warehousing and manufacturing have seen increased demand. And higher-income households, unable to travel or dine out, have built up a high level of savings.

The next round of stimulus payments 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-a-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 coronavirus 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 cause businesses to close or scale back. Even when the nation 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 2020. 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 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."

Richard Rubin contributed to this article.

Write to Josh Mitchell at joshua.mitchell@wsj.com

 

(END) Dow Jones Newswires

February 26, 2021 17:20 ET (22:20 GMT)

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