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American consumer spending jumped in January thanks to stimulus checks

Incomes rose 10% in January — the biggest increase since April of last year, when expanded unemployment benefits and stimulus checks from the CARES Act put more cash in American’s wallets, the Commerce Department reported Friday.

As a result, consumer spending increased by 2.4% last month. The jump is great news for America’s economy, two-thirds of which relies on consumer spending. That said, spending rose ever so slightly less than economists predicted and is still below pre-pandemic levels.

“The 10% surge in personal income was used wisely with some funds ending up in the piggy bank, some used to pay off debt, and a decent chunk used to restock, refuel, redesign, and revive old spending habits,” said Gregory Daco, chief US economist at Oxford Economics.

Washington’s second stimulus package, signed in late December, includes one-off payments to eligible individuals of up to $600. The unemployed receive an additional $300 weekly enhancement through March 14.

The January data show that “while many activities remain constrained, substantial fiscal support will disproportionately impact savings as opposed to consumption,” Citi economist Veronica Clark said in a note to clients.

President Joe Biden’s proposed $1.9 trillion spending package, which would be the third stimulus deal since the pandemic began about a year ago, would likely further boost incomes and spending, Clark said.

Americans have also been saving more during the pandemic, as much of public life remains shut down. The personal savings rate stood at 20.5% in January. As the economy reopens, these savings should facilitate even more spending and help the recovery along.

This is also when economists predict some inflationary spikes will happen. As consumers start spending again, prices might be driven up. The Federal Reserve expects these spikes to be temporary and not make a big difference in the long run.

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