Personal income surged in January as Americans received $600 stimulus checks, leading to new optimism about the nation’s recovery from the pandemic.
The monthly report issued by the Bureau of Economic Analysis for January noted a personal income increase of 10%, the second largest on record, was aided by federal stimulus checks and a $300 a week boost to unemployment benefits. Consumer spending had an increase of 2.4%, while the savings rate continued to rise at an extraordinary rate topping 20.5% for the month.
Economists are encouraged by gains in consumer spending, which show more public confidence in the economy and the nation’s COVID-19 recovery. As employment in service and hospitality sectors returns there is hope household income will continue to rise without the aid of the government, giving Americans the confidence to spend their paychecks as a result of their past year’s savings.
The growth in spending in the month after the holiday season is unprecedented. “The stimulus checks along with more people getting vaccinated has started to restore public hope and confidence,” says Stephen Stanley, chief economist at Amherst Pierpont Securities. “This isn’t the seasonal adjustment we are used to seeing…the spending rebound can be attributed to consumers having more options to spend their stimulus, with some shut-downs being lifted,” said Stanley.
While federal aid surely encouraged more consumer spending, Stanley attributes the unusual growth in January to a continued rise in savings over the last year, with some families benefiting from having fewer outlets for expenditures. “While employment hasn’t reached pre-pandemic levels, wages are actually slightly higher than where we were at this time last year. The stimulus is extra money to those employed,” said Stanley
Looking ahead, those who have been able to maintain employment for the duration of the pandemic have saved at an extraordinary rate. This is evidenced by the growth in the personal savings rate, the amount of discretionary income the average consumer saves per month, which jumped in January to 20.5%. These statistics generate hope those savings will lead to more spending in the coming months.
Economists believe the growth rate in consumer spending, combined with the return of service and hospitality jobs after being sidelined during the winter shutdown, means the economy will continue to grow—and maybe create the potential for a post-COVID boom.
Overall, personal income growth will be driven by the number of people returning to work. The stimulus package that is expected to be passed in the coming weeks will also likely be the final federal aid package passed.
“It could take 2 or 3 years for wages and employment to be fully stabilized. But the hope is that this better consumption will lead to more employment,” says Michael Gapen, Chief US Economist at Barclays. Gapen anticipates that when consumers begin to return to restaurants and bars, stay in hotels and fly on airlines, jobs in sectors of the economy most heavily affected by the pandemic will return.
An added consideration is that each week, more Americans get vaccinated. Economists believe spending growth will continue as more people return to places like gyms and salons. If spending continues to grow, many economists hope the job market will soon follow.