Income and spending get off to a good 2021 start. But we're nowhere near recovered

On the face, today’s income and spending report indicates 2021 started with a bang for these key factors in the US economy.

A fresh round of government stimulus checks sent personal income up to its biggest monthly gain since April 2020 though inflation remained tame, the Commerce Department reported Friday.

Personal income jumped 10% after a 0.6% increase in December. That was even higher than the 9.5% Dow Jones estimate.

The gain came from the issuance of $600 stimulus payments that Congress approved for millions of Americans, along with enhanced unemployment benefits. Consumers took those checks and spent them quickly, sending retail sales surging and pushing overall expenditures up 2.4% for the month, a touch below the estimate of 2.5%.

Very good stuff, particular given that incomes had stagnated in the latter half of 2020 as previous stimulus measures faded.

However, if you dig into https://www.bea.gov/sites/default/files/2021-02/effects-of-selected-federal-pandemic-response-programs-on-personal-income-january-2021.pdf> the supplemental tables on COVID-era legislation, you see that almost the entire increase in income is due to measures that passed Congress and were signed into law (after some delay) by President Trump in late December 2020.

Increase in income, annual basis, Jan 2021
$600/$1,200 stimulus checks +$1,660.9 billion
$300/week unemployment add-on +$261.2 billion
All other income +$32.6 billion (+0.176% vs December)

You can see how this boost in income was a smaller version of what we saw last Spring in the CARES Act, and that the underlying fundamentals in income growth barely changed at all.

This also means we likely see a big decline in February incomes because most people have already received their stimulus checks. Wages and salaries did see their growth get back to the higher levels of September and October, but some of that was likely related to automatice increases that hit at the start of a new year.

On the spending side, there was a nice (seasonally adjusted) rebound after two down months.

The $340.9 billion increase in current dollar PCE in January reflected an increase of $277.2 billion in spending for goods and a $63.7 billion increase in spending for services (table 5). Within goods, the increases were widespread across all categories, led by recreational goods and vehicles (notably, information processing equipment) as well as food and beverages, based on Census Monthly Retail Trade Survey (MRTS) data. Within services, the increase was led by spending for food services and accommodations (more than accounted for by food services), based on MRTS data. Spending for health care (led by outpatient services) also increased, reflecting data on the volume of visits as well as revenue data. Partly offsetting these increases was a decrease in housing and utilities (led by electricity and gas), reflecting data from the Energy Information Administration.

The rebound in food service spending is an especially good sign, because that sector had been battered as COVID resurged in the last 3 months of 2020. And even with a stronger January, spending in that discretionary area is still quite a bit below its September peak. And several sectors still have not returned to the levels of spending that they were at in the pre-COVID World.

It's worth noting that the increase in spending for January was less than 20% of the increase in income for the month, which means that much of those “stimulus” checks were saved and used to pay regular bills rather than bumping up economic activity.

That has its own positive effect on the economy by slowing the possibility of COVID Recession, Part 2 (well except for the part of the income boost that got pumped into GameStop or the Reddit Scheme of the Day), but we will have to wait for February and March’s spending numbers to see if the expectation of new stimulus checks and the recovery from COVID’s worst months is truly translating into a more durable economic recovery.

So far, January’s numbers have been good ones other than the increase in unemployment claims. But that’s still quite a drag, and even with improving COVID numbers, we are nowhere near a point of economic stability. More assistance is needed, and Dems in Congress need to deliver on stimulus now.