Incomes Surge from Stimulus Checks

 


Consumer spending expanded but not so spectacularly. It rose 4.2% after contracting 1% in February. Spending on big-ticket durable goods, including vehicles, drove those gains. Next up, spending on nondurable goods included everything from groceries to eating out; fast food restaurants did particularly well in the first quarter of the year. Spending on services posted decent gains but trailed previous peaks. Vacation travel returned for spring break. Those who were vaccinated also caught up on medical visits they had missed or delayed during the height of contagion.

The saving rate hit 27.6% - more than $6 trillion - which is below the peak of 33.7% reached in April 2020. Most of the stimulus checks were saved or used to pay off bills that accumulated late last year. Despite that, one in five Americans reported in April that their family finances are worse than prior to lockdowns; that’s from a poll by The Washington Post and ABC News.

The personal consumption expenditures (PCE) index, which is a more accurate measure of inflation than the CPI, rose 0.5% in March, more than double the pace of February. The PCE index jumped 2.3% from a year ago after rising only 1.5% from a year ago in February. That was the warmest annual pace for the PCE index since mid-2018, but is largely due to weak inflation a year ago. It should be noted that inflation measures in the March-May period are being distorted upward on a year-over-year basis because prices decelerated sharply when the pandemic struck a year ago.

The core PCE rose 0.4% in March compared to February and 1.8% from a year ago. That is the warmest we have seen in core inflation since February 2020, but still below the Federal Reserve’s 2% target. The core PCE rose a tepid 1.4% from a year ago in February.

Separately, the employment cost index (ECI) which provides a more accurate measure of underlying wage and benefit costs, rose 1% during the first quarter. That pushed total compensation packages up 2.8% from a year ago, slightly faster than the 2.6% pace at the end of 2020. Overall compensation growth is essentially flat compared with precrisis levels. Gains were concentrated in wages and salaries and in one sector of the economy: the financial services sector, where the pace of wage gains more than doubled on a year-over-year basis.

That is one of many reasons that the Federal Reserve remains optimistic that any flare in inflation we experience will not become entrenched; we don’t have the wage gains to support a sustained rise in prices.


 

Bottom Line

 

Stimulus checks are losing their luster when it comes to consumer spending but have provided a cushion on saving. Look for more consumers to tap those funds as more vaccinations ramp up and warmer temperatures reopen outdoor venues. The key to getting the bang for the buck on stimulus checks is herd immunity, which would allow a fuller reopening of the economy. Vaccinations, warmer weather and the move to outdoor venues should help to contain the spread of the virus and spur more spending in the second quarter.

 

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Copyright © 2021 Diane Swonk – All rights reserved.  The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.

 

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