Consumer spending dipped 1% as winter storms raked the US

Shoppers look at items in Bed, Bath and Beyond, Thursday, March 25, 2021, in New York. (AP Photo/Mark Lennihan)

WASHINGTON, D.C. — Consumers spending and personal incomes both fell sharply in February as severe winter storms disrupted shopping in many parts of the country and the government wrapped up distribution of $600 relief payments.

However, both are expected rebound strongly this month as more people are vaccinated and flush with a second round of pandemic aid, this time in larger, $1,400 individual payments.

Consumer spending fell 1% last month, the Commerce Department reported Friday, the biggest drop since last April when spending tumbled 12.4% as the country was broadsided by the global pandemic.

Incomes fell a record 7.1% last month, a period when the government was completing the bulk of the $600 payments from December’s $900 billion relief bill.

Temperatures are rising with the arrival of spring, meaning consumers will be growing more active, and the Treasury Department reported this week that it had made 127 million payments totaling $325 billion in the first two weeks after President Joe Biden had signed the latest economic support package totaling $1.9 trillion.

“With $1,400 stimulus checks making their way into bank accounts, health conditions improving and weather warming up, U.S. consumers look ready for a spring bloom,” said Gregory Daco, chief U.S economist at Oxford Economics.

Consumer spending, which is closely watched because it accounts for 70% of economic activity, jumped 3.4% in January. Personal incomes, which provide the fuel for future spending, surged 10.1% the same month as the U.S. doled out $600 checks.

All the government support and ultra-low interest rate policies from the Federal Reserve have raised concerns that inflation could take off as the economy opens up. A price gauge tied to spending that is followed by Fed officials showed an increase of 1.6% over the 12 months ending in February, up from a 1.4% gain in January.

However, much of that increase reflected rising energy costs. Core inflation, by this measure was up 1.4% for the 12 months ending in February, down from a 1.5% gain in January. The inflation readings remain below the Fed’s 2% target for annual price increases and Fed Chairman Jerome Powell repeated this week that any rise in inflation this year should be temporary. 

In addition to the boost from another round of stimulus checks, economists believe spending will be supported this year by the buildup in household savings over the past year as consumers stayed away from restaurants and cancelled vacations. The government reported that personal savings totaled a sizable $2.41 trillion with the saving rate, saving as a percentage of after-tax income, at 13.6%.

The overall economy, as measured by the gross domestic product, grew at an annual rate of 4.3% in the fourth quarter, capping a year when GDP plunged by 3.5%, the biggest annual setback in more than seven decades.

Mark Zandi, chief economist at Moody’s Analytics, said he expects GDP fueled by strong consumer spending, will grow at an annual 5.1% this quarter followed by quarterly growth rates continuing to rise for the rest of the year, giving the economy 6% growth for all of 2021, the strongest performance in 37 years.

“It will be a boom year,” Zandi said. “The economy will be helped by an end to the pandemic which will make people feel comfortable about going out, along with massive support from the federal government and pent-up demand from consumers.”