By: Zameena Mejia
The U.S. economy picked up steam in early 2016 as consumers earned and spent more, surpassing weak expectations and overcoming December’s bleak spending.
Consumer spending rose 0.5 percent in January, the Commerce Department said in a report released Friday, as wintery weather brought down temperatures and drove up demand for utility services like gas and electricity to warm spaces up. Spending is up from a revised 0.1 percent in December.
Spending in durable goods—such as motor vehicles and furniture—and nondurable goods—like food and fuel—sped up compared to falling percentages in December.
Personal income increased 0.5 percent in January, reaching its strongest growth since June 2015. Fourteen states and cities rung in the new year with minimum wage increases, strengthening wages and salaries—the largest component of personal income—with a 0.6 percent gain.
About 70 percent of the U.S. economy is driven by consumers. Americans are in financially better shape, despite their weariness about the stock market, and are spending more because they have more money in their pocket, says Russell Price, senior economist for Ameriprise Financial.
“We’re at the point where labor market conditions are tightening enough to where we’re finally starting to get some traction on wages and salaries,” says Price. “So companies are becoming more aware that in order to keep good workers and attract additional good workers they need to increase wages just a bit.”
In a separate release, the Labor Department’s headline 151,000-payroll rise gave slight hope to growing number of jobs, but Michael Englund, Chief Economist for Action Economics, says focusing on the growing workforce and rising wages will better understand why personal income might once more have a bright future. Englund adds too many people focused on the lean payroll gain instead of the “remarkably strong hours worked and hourly earning figures.”
“Our interpretation of the labor market is that the public clearly perceives it as weak and it’s reasonable because the unemployment rate is falling and an atypically large number of people have given up looking for work,” says Englund.
Despite gains in consumer income and spending, the savings rate has remained at a steady 5.2 percent, the same increase experienced in December. Americans can afford to save some money from their income while paying off debt and still have some saved away in case of an emergency.
The report also showed inflation picking up to 1.3 percent in January from a year earlier; the “core” index, which excludes volatile food and energy prices, rose 1.7 percent, the highest it has been since July 2014. The Federal Reserve uses this price index as one measure of inflation due to it covering a wide range of household spending. By this standard, the economy is nearing the Fed’s ideal rate of inflation and may lead them to raise interest rates at its March meeting.
