U.S. consumer spending rose at the fastest pace in nine months while incomes soared by a record amount in March, reflecting billions of dollars in government support payments aimed at putting the country firmly on the road to recovery.
Consumer spending rose 4.2 percent last month, the Commerce Department said Friday, the best showing since a 6.5-percent spending increase in June. Spending had fallen 1 percent in February as frigid winter weather disrupted sales.
Incomes surged by a record-breaking 21.1 percent in March after having fallen 7 percent in February. The big gain reflected delivery of billions of dollars in relief payments with individuals getting up to $1,400 payments from the $1.9 trillion support package President Joe Biden pushed through Congress last month.
The strong gains offer yet more evidence that the economy is poised for a rapid recovery following last year’s pandemic-triggered recession. Economists are counting on strong consumer spending, which accounts for two-thirds of economic activity, to power a rebound this year with a trio of economic factors coming to a head: trillions of dollars in government support; increased mobility due to vaccinations; and a surge in pent-up consumer demand.
The government reported Thursday that the overall economy, as measured by the gross domestic product,, rose at a robust annual rate of 6.4 percent in the January-March quarter. Many analysts believe that growth in the current April-June quarter will be even stronger, perhaps topping 10 percent.
Friday’s report showed that inflation rose 2.3 percent in March compared to the same month a year ago but excluding volatile food and energy, the gain was a lower 1.8 percent.
The Fed at this week’s meeting kept its key interest rate at a record low of 0 percent to 0.25 percent and Fed Chairman Jerome Powell said the central bank will not be concerned by what it expects will be a temporary blip in inflation this spring.
Friday’s report showed that consumers saved a lot of their big surge in incomes in March, pushing the savings rate to 27.6 percent, up from an already elevated 13.9 percent in February.
Excess household saving now totals around $2.3 trillion, a figure that has been climbing over the past year of lockdowns.
Analysts believe consumers will start spending this savings stockpile in coming months as increased vaccinations get them back into stores to shop, providing a strong boost to the overall economy this year.
“The strong consumer showing at the end of the first quarter sets the tone for a summer boom,” said Gregory Daco, chief economist at Oxford Economics. “As health conditions improve and the economy reopens, generous fiscal stimulus, rebounding employment and rising optimism will help unleash pent-up demand.”
Daco forecast that consumer spending will increase by more than 9 percent this year, the strongest performance since 1946.
Friday’s report showed that the 4.2-percent rise in spending reflected an increase of 8.1 percent in the purchase of goods and a smaller 2.2 percent rise in the purchase of services, a category which includes restaurant dining, entertainment and other activities which have suffered the most from the pandemic shutdowns. The expectation is that spending on services will keep rising if the virus situation keeps improving.