US consumer spending rebounded in March amid a surge in income as households received additional Covid-19 pandemic relief money from the government, building a strong foundation for a further acceleration in consumption in the second quarter.
Other data on Friday showed labour costs jumped by the most in 14 years in the first quarter, driven by a pick-up in wage growth as companies competed for workers to boost production. The White House's massive $1.9 trillion fiscal stimulus and rapidly improving public health are unleashing pent-up demand.
"While we aren't completely out of the woods yet, today's report shows the beginning of an economic rebound," said Brendan Coughlin, head of consumer banking at Citizens in Boston. "Assuming no setback in the continued rollout of the vaccines, US consumers are well-positioned in the second half of the year to stimulate strong economic growth across the country."
Consumer spending, which accounts for more than two-thirds of US economic activity, increased 4.2% last month after falling 1.0% in February, the Commerce Department said. Economists polled by Reuters had forecast consumer spending would increase 4.1%.
The data was included in Thursday's gross domestic product report for the first quarter, which showed growth shooting up at a 6.4% annualized rate in the first three months of the year after rising at a 4.3% pace in the fourth quarter. Consumer spending powered ahead at a 10.7% rate last quarter.
Most Americans in the middle- and low-income brackets received one-time $1,400 stimulus checks last month which were part of the pandemic rescue package approved in March. That boosted personal income 21.1% after a decline of 7.0% in February.
A chunk of the cash was stashed away, with the saving rate soaring to 27.6% from 13.9% in February. Households have amassed at least $2 trillion in excess savings, which could provide a powerful tailwind for consumer spending this year and beyond.
Wages are also rising. In a separate report on Friday, the Labor Department said its Employment Cost Index, the broadest measure of labor costs, jumped 0.9% in the first quarter. That was the largest rise since the second quarter of 2007 and followed a 0.7% gain in the October-December quarter.
The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation as it adjusts for composition and job quality changes. Last quarter's increase was driven by a 1.0% rise in wages, which followed a 0.8% increase in the fourth quarter.
Despite employment being 8.4 million jobs below its peak in February 2020, businesses are struggling to find qualified workers as they rush to meet the robust domestic demand.
US stocks opened lower after a recent rally. The dollar rose against a basket of currencies. US Treasury prices were largely unchanged.
Federal Reserve Chair Jerome Powell on Wednesday acknowledged the worker shortage saying "one big factor would be schools aren't open yet, so there's still people who are at home taking care of their children, and would like to be back in the workforce, but can't be yet."
Higher wages, if the worker scarcity persists, could contribute to a boost in inflation this year.
The strengthening demand and the dropping of last year's weak readings from the calculation lifted inflation last month.
The personal consumption expenditures (PCE) price index excluding the volatile food and energy component increased 0.4% after edging up 0.1% in February. In the 12 months through March, the so-called core PCE price index increased 1.8%, the most since February 2020, after gaining 1.4% in February.
The core PCE price index is the Fed's preferred inflation measure for its 2% target, which is a flexible average.
Powell reiterated on Wednesday that while he anticipated some upward pressure on prices, "an episode of one-time price increases as the economy reopens is not the same thing as, and is not likely to lead to, persistently higher year-over-year inflation into the future."
Households last month spent more on motor vehicles and recreational goods like games and toys. They also visited restaurants. Spending on services is expected to accelerate in the months ahead as vaccinated Americans travel among other activities after more than a year of being cooped up at home.
When adjusted for inflation, consumer spending rebounded 3.6% last month after falling 1.2% in February. The recovery in the so-called real consumer spending sets consumption on a higher growth trajectory heading into the second quarter.
Most economists expect double-digit growth this quarter, which would position the economy to achieve growth of at least 7%, which would be the fastest since 1984. The economy contracted 3.5% in 2020, its worst performance in 74 years.