The impact of the $1.9 trillion in fiscal aid put on the table this year bolstered U.S. personal income by a record 21.1% in March, resulting in a 4.2% increase in personal spending.
We now expect the first estimate of first-quarter GDP to be revised upward from 6.4% to closer to 7%.
Income excluding government transfers increased by 0.9% on the month. Compensation increased by 1%, while wages and salaries advanced by 1.1%. Those direct cash transfers resulted in a 23.6% increase in disposable income.
On a three-month average annualized pace, those gains resulted in a jump of 14.6% in spending, which is well above the 10.7% gain in spending in the first-quarter gross domestic product report published on Thursday. We now expect the first estimate of first-quarter GDP to be revised upward from 6.4% to closer to 7% before all is said and done.
In addition, the substantial increase in savings strongly suggests that there is risk of a much quicker pace of GDP growth in the current quarter relative to our forecast of 10.7%.
Direct-income transfers not only boosted spending but they also resulted in an increase in the U.S. savings rate to 27.6% in March from 13.9% in February. In dollar terms, U.S. household savings stand at $6.0 trillion, which is well above the pre-pandemic 20-year average of $730 billion.
The data implies that American households are now in a position to repair balance sheets by paying down debt while creating sizeable cash buffers against future instability. This will almost certainly support a period of household spending over the next three months that will be one for the record books.
Inside the report, the core personal consumption deflator on a year-ago basis increased from 1.4% in February to 1.8% in March. This is the Federal Reserve’s primary policy variable and is in line with the central bank’s forecast of higher inflation.
Yet even with the base effects of the collapse in demand and prices a year ago, it is still below the Fed’s 2% target.
In our estimation, the increase in this metric — the single best predictor of long-term inflation — will do little to alter the path of policy out of the central bank because of perceived risk to the economic outlook around inflation.
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