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Boost to Household Income Primes U.S. Economy for Stronger Growth

The economy looks to be bouncing back.
(Tiko Aramyan)
(Tiko Aramyan)
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“U.S. household income jumped 10% in January as the government delivered stimulus payments to households and consumer spending rose 2.4%, priming the economy for a burst in growth this year,” WSJ writes.

Why It Matters: This marks the second-largest increase in income on record. The only greater one was last April when the government sent out the first round of pandemic relief payments.

  • “January’s rise in consumer spending was the first since October.”

According to Oxford Economics: Output is predicted to improve 7% this year, which would represent the strongest growth in decades.

  • A WSJ poll of economists predicted GDP to expand by almost 4.9% this year on average.
  • GDP fell 3.5% in 2020 compared to 2019, according to the Commerce Department.

“Consumer spending is the biggest factor behind growth in the U.S. Spending soared in the summer, grew modestly in early fall and then fell the final two months of last year. The decline at the end of last year occurred as states and cities ordered businesses to shut or scale back again, as virus infections resurged, restricting consumers’ ability to spend. Also, the effects of an earlier stimulus bill passed at the outset of the coronavirus pandemic faded.”

The Takeaway: “Thanks to the new stimulus efforts and high savings among upper-income and wealthy households,” there’s money to flow back into the economy.

  • Income already reached pre-pandemic levels in December, with the savings rate historically high.
  • New virus cases have been trending down, allowing certain states to ease restrictions.

Justin Oh:

If spending growth returns in the midst of stimulus and easy money policies, it could be a factor in driving up inflation, which would drive up interest rates. That is, of course, unless the Fed refuses to tighten its policy and increases its Quantitative Easing.

It’s impossible to predict when or if inflation will really come, but it’s the primary of the markets right now. If rates keep rising, it would be a continued headwind against stock prices.

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