Personal income was up a remarkable 10 percent in January, the Commerce Department reported on Friday, but the increase was almost entirely attributable to the $600 government relief checks and unemployment insurance payments.
Spending last month increased by a healthy 2.4 percent, largely because of purchases of goods, while purchases of services lagged as the pandemic continued to weigh on the leisure and hospitality industries.
It was the biggest jump in personal income since April, when the figure was lifted by nearly $3 trillion in government transfer payments. That was mostly in the form of $1,200 checks that millions of households received from the federal government.
The January data was the latest sign of the economy’s march forward, a trend also seen in recent reports on retail sales and orders of durable goods. Some economists are now predicting not just a period of growth after the pandemic, but perhaps even a post-Covid boom.
Yields on government bonds, the basis for mortgage rates and corporate borrowing, have risen sharply this month as investors anticipate a quick pickup in growth this year. Yields on 10-year Treasury notes, for example, which were below 1 percent for much of 2020, climbed above 1.5 percent on Thursday before pulling back slightly on Friday.
That sudden jump also reflects concerns that the growth would cause inflation to become a problem, prompting the Federal Reserve to cut back on its measures to bolster the economy. A change of posture from the Fed is likely to be seen as bad news for stocks, and trading on Wall Street has been turbulent all week as investors react to the sudden moves in bond yields.
The January report on income and spending also underscored the importance of government help for the economy, said Diane Swonk, chief economist for the accounting firm Grant Thornton.
“Technically, you could say we’re recovering,” she said. “But the patterns in both income and spending point out the fragility of the recovery without aid to bridge these waters that are poisonous.”
Still, the combination of government aid and reduced spending because of the pandemic led to a big buildup in savings last year, said Jay Bryson, chief economist for Wells Fargo, which could prompt Americans to spend more in the future. He estimates that U.S. households were sitting on $1.5 trillion in extra savings even before the latest round of stimulus payments.
“People were getting all this money and they had no place to spend it because the economy was shut down,” he said. “So what did they do? They literally put it in the bank.”
That cash stockpile will grow even larger if Congress passes another round of aid, as now seems likely. But as the pandemic ebbs, Americans are likely to start spending again — turning the built-up savings into fuel for the economy.
“We just think there’s going to be this huge pent-up demand for services that’s going to be funded by that excess savings,” Mr. Bryson said.
But not all the government aid is being saved. Retail sales surged in January, a sign that some Americans were spending the money. Some of that spending might have been on essentials, as unemployed workers refilled pantries after weeks with little help. But some of it might also reflect the gradual reopening of the American economy, even as the pandemic continues to rage.
“We’ve learned to deal with this thing in the last year,” Mr. Bryson said.
Gregory Daco, chief U.S. economist at Oxford Economics, said the months ahead could be bumpy, with consumer spending gradually warming up in the spring and summer as the combination of a new round of stimulus, reduced infections and vaccine distribution gets people and their money into greater circulation.
“We know what is restraining consumer spending,” he said — namely the health crisis and, for some families, the means. “And what the January report reveals is that if both of these factors are alleviated in terms of constraints, then consumers will spend and then the recovery will be strong.”