US household incomes last month surged by the most on record, boosted by a fiscal stimulus that also drove a sharp increase in spending, laying the groundwork for strong economic growth in the second quarter.
Personal incomes climbed 21.1 per cent in March from the previous month, the commerce department said on Friday, a record in data that stretches back to 1946. The figure represented a sharp reversal from February’s 7 per cent decline and topped economists’ expectations for a 20.3 per cent increase.
The income increase was accompanied by a rebound in spending, as consumption rose 4.2 per cent last month — the biggest gain since June. There was also an upsurge in the savings rate to 27.6 per cent, from 13.9 per cent previously.
“This puts consumption — and likely GDP — on track for double digit growth in the second quarter,” said Aneta Markowska, chief economist at Jefferies. “While stimulus payments are largely behind us, the savings rate jumped to 27.6 per cent in March, which will continue to support spending in the coming months.”
US gross domestic product advanced 6.4 per cent on an annualised basis in the first quarter, according to data released on Thursday, driven by a 10.7 per cent increase in personal consumption expenditures and spending on goods in particular.
Americans have been able to loosen their purse strings thanks in part to two stimulus packages: a $900bn deal approved in December and a further $1.9tn package enacted last month.
A rapid rollout of Covid-19 vaccines and fewer restrictions on business activity and travel, as coronavirus hospitalisations decline, has further propelled spending.
“The strong consumer showing at the end of Q1 sets the tone for a summer boom,” said Gregory Daco, economist at Oxford Economics, who predicted real consumption growth of more than 9 per cent this year, the strongest performance since 1946.
“Household incomes are, on an annualised basis, $5tn higher than they were before the pandemic hit,” said James Knightley, economist at ING. “An astonishing figure that helps to explain why the US economy has performed so well relative to Europe.”
Friday’s report also showed that the personal consumption expenditure price index rose 2.3 per cent year on year in March. The so-called core PCE index, the Federal Reserve’s preferred inflation gauge, rose 1.8 per cent over the same period.
The Fed has signalled it is no rush to unwind its ultra-accommodative monetary policy even as some investors and economists have grown concerned about a more sustained acceleration in inflation.
The central bank has previously said it expects inflation to be transitory and highlighted so-called base effects, which reflect that prices crashed this time last year as the coronavirus pandemic intensified.
Source: Economy - ft.com
