Household income increased at a record rate of 21.1 percent in March, as federal stimulus checks fueled an economic recovery that is expected to last despite an easing pandemic.
Last month’s increase in income was the largest monthly increase in government records dating back to 1959, reflecting $1,400 stimulus checks and other government aid included in a $1.9 trillion fiscal relief package signed into law in March. Spending was also up sharply, increasing 4.2%, the Commerce Department said Friday. That was the steepest month-over-month increase since last summer.
Americans will have more money to spend as the economy recovers in the coming months. Personal savings increased to 27.6 percent in March, up from 13.9 percent the previous month.
Consumers increased their spending on goods by 8.1 percent in March, with a large portion of that going toward big-ticket items. Following a flat month in February, service spending increased by a more modest 2.2 percent last month. Economists believe that widespread vaccinations and a broader reopening of the economy will help the recovery last after the effects of fiscal stimulus fade.
“If we have Covid-19 cases under control, that would ideally make way for us to reopen the services sector of the economy,” said Pooja Sriram, U.S. economist at Barclays. “That, in fact, is a crucial aspect of ensuring that this recovery continues.”
According to data-analytics firm Earnest Research, stimulus payments included in the latest package pushed spending the most of all three rounds of pandemic stimulus checks. Earnest transaction data show that people who received stimulus funds increased total spending growth by 29 percentage points in mid-March compared to the same period in 2019. This outperformed increases of 23 and 22 points following the first and second stimulus checks, respectively.
According to Zach Amsel, data analytics director at Earnest, the spending effect was greater this time because the checks were larger and aligned with economic reopening. According to Earnest, spending among stimulus recipients grew twice as fast in Pennsylvania, Texas, and Florida as it did in California and New York, reflecting stronger stimulus effects in states that reopened faster.
“Local economies matter,” Mr. Amsel said. “If in Texas and Florida, restrictions were never as strict as New York and California, you saw that play out since April of last year.”
Consumer spending is the most important driver of economic growth in the United States. Spending has remained stable throughout the pandemic, as consumers increased purchases of goods such as automobiles, home appliances, and furniture. In-person services, such as restaurants, nail salons, and air travel, took a hit, but are rebounding as people get vaccinated. When the economy reopens in the coming months, households will be primed to spend more of their pandemic savings. According to Moody’s Analytics, excess savings, or the extra sums of money that many Americans have stashed away since the virus struck, account for about 12% of the US gross domestic product.
Wealthier households, which lost fewer jobs during the pandemic, amassed the majority of savings during the pandemic. Despite the fact that they are more likely than lower-income households to view savings as wealth rather than income to spend, many economists believe they will spend lavishly this year to compensate for months of staying at home.
Strong consumer spending is one factor that will almost certainly drive-up inflation in the short term. Companies may raise prices if demand exceeds their ability to hire and produce.