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Consumer Spending Drove Economic Recovery in First Quarter

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The first-quarter economic recovery, when the economy expanded 1.6 percent, was powered by spending. Specifically, by spending on stuff.

Consumer spending rose 2.6 percent in the first three months of the year, with a 5.4 percent increase in spending on goods accounting for most of the growth. Americans ramped up spending on cars, furniture, recreational vehicles and other long-lasting items, as well as on clothes and food. Spending on services, which has slumped throughout the pandemic, rose by a more modest 1.1 percent.

Services spending is likely to pick up in the second quarter, as the acceleration of the vaccine rollout allows more Americans to return to restaurants, airplanes and other activities that they avoided during the pandemic. The data released Thursday by the Commerce Department largely predates that surge.

What the first-quarter data does capture is the impact of two rounds of relief checks from the federal government. After-tax personal income, adjusted for inflation, jumped 12.7 percent in the first quarter, with the government payments accounting for most of the increase. There was a similar jump in income when the first round of relief checks hit last year, which was followed by a similar surge in spending on goods.

“To some extent, when people have money, they’re going to spend it,” said Ben Herzon, executive director of IHS Markit, a forecasting firm. “If they’re not spending on services because they’re not going to movies or amusement parks, they’re going to derive utility from goods.”

He said he expected goods spending to ease in the second quarter as services spending begins to rebound more strongly.

Americans still have plenty of cash to spend. Households were sitting on a collective $4.1 trillion in savings in the first quarter, up from $1.2 trillion before the pandemic began — although such aggregates can obscure the fact that many families have seen their finances wiped out by the crisis.

Ample savings and rising consumer optimism are giving businesses the confidence to bet on the future as well. Business investment rose 2.4 percent in the first quarter and is now above its prepandemic level. The housing market has been juiced by low interest rates and strong demand; residential construction spending rose 2.6 percent in the first quarter.

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Filed Under: BUSINESS Tagged With: Business, Commerce Department, Consumer Behavior, Coronavirus (2019-nCoV), Economic recovery, Economy, Finances, Food, Furniture, Government, Income, Inflation, Interest Rates, Money, Movies, Recreational Vehicles, Restaurants, Savings

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