- Personal income surged by 10% month-on-month in January, on par with market expectations. The strength was largely due to the increase in social benefits (+52.6% m/m), specifically, the stimulus checks and expanded unemployment insurance benefits from the relief act enacted at the end of 2020. Wages and salaries rose by 0.7% on the month. Proprietors’ income declined by 0.5% despite the renewed support of the Paycheck Protection Program’s second round.
- Subtracting inflation and taxes, real disposable income rose by 11% on the month and 13.3% year-on-year.
- Personal spending rose by 2.4% m/m in January, a hair below the consensus call of 2.5%. Spending growth was led by goods, up 5.8%, with services up 0.7%. The increase in goods spending was broad-based with recreational goods and vehicles (notably, information processing equipment) driving the increasing. In services, gains were led by food services and accommodation, one of the most battered industries during the pandemic.
- Rising income pushed the personal saving rate up to 20% last month, the level last seen in June 2020. The total amount of savings above the pre-pandemic level is now $2.5 trillion.
- The overall PCE price deflator rose by 0.3% in January, slowing down from an increase of 0.4% in December. Year-on-year the price index was up 1.5%
- An important contributor to the increase was oil prices. Energy goods and services prices climbed by 3.5% for the month after rising by 2.7% in December.
- Food prices declined by 0.1% in January after rising by 0.2% in December.
- After removing energy and food prices, the core PCE deflator remained flat at 0.3% m/m, but increased to 1.5% y/y (from 1.4% in December).
Key Implications
- Consumers remain at the helm of the American economy. January spending rebounded solidly as income support measures kicked in. Despite social distancing and pandemic-related restrictions, services consumption fared relatively well, even within the hard-hit food and accommodation sector.
- With solid growth in personal income and spending, concerns over inflation have reached a fever pitch. Today’s report hardly points to inflation spiraling out of control, but indicates ongoing recovery. In his testimony this week, Fed Chair Jerome Powell described inflation as “soft” and reaffirmed that it will not dissuade the Fed from continuing to support the economy.
- The economic outlook is increasingly upbeat. Encouraged by the rollout of vaccines, consumers seem to be more confident in spending money than they were several months ago. As the economy continues to open up, another round of income support measures proposed in the American Rescue Plan combined with sizeable household savings should spur spending on activities put on hold during the pandemic, allowing the economic recovery to pick up considerable steam
