Uncle Sam Prompts Surge in Household Income, Savings

Savings Rate Jumps to Highest Since May

Woman looking into their shopping bags in a cozy loft apartment

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The federal government's latest injection of cash supercharged the U.S. economy in January, sending household income and savings rates shooting up in jumps not seen since the early days of pandemic-era relief. 

Personal income vaulted 10% in January, the biggest jump since April of last year, boosting spending some, but savings more, according to data released by the U.S. Bureau of Economic Analysis Friday. The percentage of disposable income saved rose from 13.4% to 20.5%—the biggest share since May.

The federal government’s second round of stimulus checks—up to $600 per taxpayer—hit bank accounts last month, and federal supplements to state unemployment benefits were reinstated, this time at $300 a week. Earnings from paychecks, which normally drive the changes to personal income, increased 0.7% in January.

Spending rose for the first time in three months, increasing 2.4%, mostly on goods rather than services. But maybe more importantly, the numbers bode well for future spending, which economists are relying on to stimulate economic growth this year, particularly if the prevalence of COVID-19 vaccines makes it easier to resume something resembling normal life. What’s more, the latest influx of cash might just be the start, with Congress considering another stimulus package, this time envisioned by President Joe Biden. 

“Overall, an impressive start to the year for American households, and there's more goodies to come from Santa Congress,” Sal Guatieri, BMO Capital Markets senior economist, wrote in an online commentary. Personal saving has been so high throughout the pandemic that there's now enough accumulated excess savings to support three years worth of consumer spending growth, he said.

The 10% increase in personal income was roughly in line with the 10.5% expected by Moody’s Analytics and slightly better than the 9.6% median forecast of economists cited by Moody’s.

Meanwhile, inflation stayed at bay (at least for now), with the Personal Consumption Expenditure (PCE) index rising 1.5% from January 2020, excluding food and energy prices. In December, this core inflation rate was 1.4%, and it’s hovered in that range for the last six months. Oxford Economics forecast Friday that the rate may reach 2.3% by April—slightly higher than the Federal Reserve’s normal target of 2%.