Personal Taxes

U.S. Private Earnings Up 10% in January, Spending Up 2.4% – 2nd Replace

By Josh Mitchell

US household incomes rose 10% in January as the government paid stimulus payments to households and consumer spending soared, preparing the economy for a spurt of growth this year.

The rise in income was the second largest in history and was only dwarfed by last April’s profit when the federal government sent a first round of pandemic aid payments, the Commerce Department said on Friday. Household income has increased 13% since February 2020, the month before the pandemic that paralyzed large parts of the economy.

Spending rose 2.4% in January, the first increase in three months and the biggest jump since last summer. Households by and large spent on goods, especially big-ticket, durable items. Spending on services also rose for the first time since last October.

Americans are now sitting on a historically great pile of cash. Her savings were $ 3.9 trillion last month, up from $ 1.4 trillion last February.

“The levels are off the charts,” said Joseph Brusuelas, chief economist at RSM US LLP, of the cash reserves. “You will see the fuel for a pretty big, consumer-led boom this year that will spill over into the next.” He expects the economy to grow 6.5% or more this year.

The growth in household income is almost entirely due to federal pandemic aid.

As part of a US $ 900 billion stimulus plan that went into effect at the end of December, the federal government made one-time cash payments of US $ 600 to most households. In addition to normal unemployment benefits, unemployed workers were paid US $ 300 per week. In the meantime, employment continued to grow in January after falling in December. And higher-income households who cannot travel or eat out have built up large amounts of savings.

More government money is likely to be pouring into the economy soon.

The $ 1.9 trillion pandemic bill, set for a House vote and subsequent Senate scrutiny Friday, would approve payments of $ 1,400 per person. That portion of the $ 422 billion plan could quickly be paid out to households after President Biden legally signed it. The Internal Revenue Service has shown last year that it can transfer the majority of money to bank accounts within a week or two of it going into effect.

In addition, the IRS will send the regular refunds during the tax return season. Officials expect to deliver the first major wave of refunds to low-income households in the first week of March.

Other parts of the pandemic bill under scrutiny in Congress would be phased out, including the $ 400 weekly unemployment insurance surcharge and monthly upfront child tax credit payments, which would start as early as July.

The gross domestic product fell by 3.5% in 2020 compared to 2019, the Ministry of Commerce announced on Thursday. In a Wall Street Journal poll earlier this month, economists expected average GDP growth of nearly 4.9% this year.

There are major risks that could undermine economic recovery. While U.S. citizens receive the vaccine, it will likely take months for the country to achieve herd immunity, medical experts say. Another virus resurgence could scare consumers and cause businesses to close or scale back. Even if the country reaches herd immunity, many consumers may be afraid to venture out in public, say economists.

Consumer spending is the biggest driver of growth in the US. Spending rose sharply in summer, grew slightly in early fall, and then fell in the last two months of last year. The decline late last year was due to states and cities ordering businesses to close or downsize as viral infections rebounded, limiting consumer spending options. The effects of an earlier stimulus bill passed at the start of the coronavirus pandemic also subsided.

New viral infections have declined, and several large states, including California and Texas, have eased restrictions in the past few weeks.

Scott Molloy, 45, was fired in August as a senior project manager for a real estate developer in San Diego. He started his own consulting business and restored some but not all of his income.

Like most Americans, he spent less money during the pandemic, largely because he didn’t eat or travel, and saved $ 300 to $ 400 a month.

But last week, not long after the California governor lifted food restrictions, Mr. Molloy went out for burgers and beer at a pub near the ocean with a friend. And he has a trip planned for April to go to a second home in Oregon, visit relatives in San Francisco, and visit friends in Lake Tahoe. He plans to fly back. “It’s going to be a full vacation that I haven’t had in over a year,” said Molloy.

Such spending will help the economy return to its pre-pandemic strength, along with additional rebound in a labor market that is still digging out of the hole created by the pandemic. Consumer spending held up well during the pandemic, as consumers placed more emphasis on goods, especially durable items such as cars, home appliances, and items purchased online. Many people have also upgraded their homes.

However, the service side – restaurants, nail salons, gyms, airlines – continues to suffer. Spending on services is expected to rise this spring as more people get vaccinated.

“People will travel more,” says Lydia Boussour, senior economist at Oxford Economics. “They’ll go back to restaurants and bars, they’ll go back to the gym – all the things they basically couldn’t do before the pandemic. You’re really going to see a surge in spending here.”

Richard Rubin contributed to this article.

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

(END) Dow Jones Newswires

Feb. 26, 2021 11:02 AM ET (4:02 PM GMT)

Copyright (c) 2021 Dow Jones & Company, Inc.

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