U.S. consumer spending recovered sharply in January following three months of decline as the arrival of stimulus checks boosted the economy and bolstered calls for a massive federal economic relief package.
Retail sales rose a seasonally adjusted 5.3 percent in January, the Commerce Department said on Wednesday. The number follows a depressing fourth quarter with a 0.3 percent average increase. The report also showed a revised December’s retail sales that declined further to 1.0 percent.
The recovery, higher than economists’ estimates, is largely attributed to the $900 billion pandemic relief bill passed in December. As a result, there is a significant level of optimism for increased spending through the rest of the year because of President Joe Biden’s proposed $1.9 trillion relief package. Fresh stimulus checks and widespread vaccine distribution is expected to help send consumers back into stores.
“We got significant stimulus checks in people’s checking accounts that boosted spending here,” said Stan Shipley, a corporate economist at Evercore. “I think this proves that stimulus checks work here.”
Similarly, consumer spending also rose in April last year, following the disbursement of the first individual $1200 stimulus checks.
The report reduces recent concerns that more households would be saving their stimulus check rather than spending and putting it back in the economy. Shipley says the willingness of consumers to spend their $600 payments means they have more capacity to sustain spending in the following months.
The growth could signal a solid growth for the first quarter of the GDP, a sign of healing for the economy, and an even greater outlook for the first half of the year with two federal economic relief aid.
“If households have more resources to spend, it clearly seems like they will spend them,” said Michael Gapen, chief economist at Barclays Capital Inc.
Assumptions of increased consumer spending will require a successful vaccine rollout that curbs the coronavirus outbreak.
There were strengths across all categories of the retail sales report. Consumers spent more on furniture compared to December, leading to a growth of 12 percentage points. Electronic sales also increased 14.7 percentage points from December.
Some economists say this growth in spending could be the result of residual Christmas spending. Many consumers cut back on both in-person and online shopping for the holiday season and likely gave gift cards as presents.
“Given that it’s hard to see your relative, you’re more likely to give them gift cards and some of them may be spent then in the month of January,” said Shipley.
However, retail sales are expected to decline for February because of a series of snow and ice storms that crippled large parts of the economy and closed stores.
“It’s not just February spending that will be weak,” said Christopher Low, chief economist at FHN Financial. “It is disrupting all kinds of logistics, oil refineries are closed, shipping is stalled and trucks aren’t rolling.”
Following the predicted decline in February, sales are expected to bounce back in March as long as the stimulus payments arrive.