Americans went on a spending spree in January despite a wave of Coronavirus cases, indicating strong economic recovery as the pandemic recedes.
Spending on goods and services rose by 2.1% during the first month of 2022, the first uptick of that measure since October, the Commerce Department reported Friday.
Consumer spending is a signifier of economic growth and, in a month marked by the surge of the Omicron variant and the end of the child tax credit, Americans’ willingness to spend in January bodes well for strong economic recovery, especially after hitting a low in December.
In fact, January’s economy was unexpectedly robust across numerous sectors, contributing to the overall improvement. The January jobs report, released Feb. 4, showed that 467,000 jobs were added that month. Meanwhile, orders for durable goods increased 1.6%, the Commerce Department reported Friday.
But soaring inflation is a major threat to continued growth. The Personal Consumption Expenditures index – the Federal Reserve’s preferred measure of inflation – showed that the price of goods and services jumped by 5.2% from January 2021. It is the highest price increase since 1983.
Adjusted for inflation, personal income actually decreased by 0.5%. But that number should not be surprising, says Peter Morici, economist and business professor at the University of Maryland. “Hours worked were down in January for the average worker” because of the Omicron wave, Morici said. “But still, people kept spending because they have large household balances yet.”
Those large household balances are decreasing as federal pandemic aid runs out. The monthly child tax credit expired in January, contributing to a drop in income for millions of families.
If income does not keep pace with inflation over the long term, it can spell trouble for the economy, with consumers unable to pay for goods and services even if they want to.
This mixed bag of promising and warning signs is reflected in consumer sentiments, says Bill Adams, chief economist at Comerica Bank. ADD: Despite higher spending, consumer sentiment sunk throughout January to its lowest levels since 2011, the University of Michigan Surveys of Consumers reported on Friday.
“There’s kind of a disconnect right now between what consumers are saying and what they’re doing,” said Adams. “Consumers say they’re really dissatisfied with the economy, they’re downbeat, they’re concerned about inflation, but they’re still spending.”
Adams attributes this negative attitude to lingering effects of the pandemic like supply shortages and bad customer service experiences resulting from labor scarcity. “It’s not a great economy to be a consumer in,” he said. “I would expect the big catalyst for consumer spending growth this year to be the pandemic coming under control.”
Meanwhile, the Federal Reserve is expected to try to keep inflation under control by raising interest rates at its March meeting. The agency must thread a difficult needle to cool the economy without sending unemployment up and the country into a recession. If it works as intended, an interest rate hike could slow price increases, making Americans’ dollars more valuable.
Even amid reasons for optimism, the world is keeping an eye on the geopolitical arena, bracing for higher energy and commodity prices after Russia began a military invasion of Ukraine on Thursday.