February 26, 2021

Personal consumption expenditures jumped 2.4% in January after having fallen 0.4% in December.    The $600 tax refund checks bolstered consumer income in January but much of that remains unspent as evidenced by the jump in the savings rate to 20.5%.  What we are really interested in is real consumption spending which rose 2.0% in January after having  declined 0.8% in December..

The March and April drop-off in spending was caused by the drastic measures taken to halt the spread of the corona virus which were imposed in mid-March.  The $1,200 tax refund checks got into consumers’ hands in May and June and spending has rebounded sharply.  To put these changes in perspective the level of real consumer spending fell sharply in March and April, but its increases subsequent increases brought the level of real consumer spending back close to where it was prior to the recession.  Goods spending has already surpassed its January high, but spending on services — in particular spending on restaurants,  air travel and hotels — has not yet fully recovered.  But with the savings rate so high and yet another fiscal stimulus bill on the way, it is bound to climb sharply in the months ahead.

Personal  income jumped 10.0% in January after having risen 0.6% in December. The January increase was largely attributable to the $600 tax refund checks which accounted for virtually all of the overall increase.

What that means is that real disposable income — what is left after paying taxes and adjusted for inflation — jumped 11.0% in January after having risen 0.2% in December.  The year-over-year increase is now 13.3% which is  far above its long-term average of 2.7%.

With the government shoving so much money into consumers’ hands in April the savings rate surged to 33.7% in that month.  But the tax refunds could not get spent in April because the economy was essentially shut down in that month.  But that money was not going to stay saved.  In fact, the savings rate steadily declined in subsequent months..  However, the next round of $600 stimulus checks distributed in January the savings rate once again surged to 20.7%.  With the savings rate so high consumer spending will continue at a brisk pace in the months ahead.

Following the  31.4% drop in second quarter GDP growth,  GDP rose 33.4% in the third quarter and 4.1% in the  fourth quarter.  We expect GDP growth in the first quarter of this year of 8.2% and growth in 2021 as a whole of 7.5% as the vaccine gets distributed and consumers feel more comfortable going out to eat and  travel, and as proceeds from the corona virus relief bill passed in December and the proposed additional fiscal stimulus package of $1.9 trillion bolster income and spending throughout the spring and summer..

Stephen Slifer


Charleston, SC