The US was unseasonably hot in January, and it wasn’t just the weather.
Friday’s data are only the latest indication that the economy got off to a strong start in 2023, underscored by the biggest jump in consumer spending in nearly two years and a reacceleration in closely watched measures of inflation. Sales of new homes also surged, following figures last week that showed strong retail sales.
It’s all underpinned by an exuberant labor market, which shocked even more to the upside with January job growth that topped all estimates and the unemployment rate retreating to a 53-year low. That’s supporting incomes, boosting sentiment and giving Americans the wherewithal to keep spending, therefore keeping inflation elevated and pressuring the Federal Reserve to act more aggressively.
The question is: How long can that strength last? The answer lies, at least in part, in to what degree that strength was a function of underlying momentum versus one-off factors.
Here are some caveats to keep in mind:
Weather: January proved to be an unseasonably warm month. The temperate weather boosted demand for things like restaurants and also drove an increase in hours worked. That likely bolstered the wages and salaries metric as well as overall consumer spending in Friday’s report from the Bureau of Economic Analysis.
Shifting shopping patterns: Pandemic-driven supply-chain challenges led to widespread shortages and shipping delays. As a result, many Americans shifted their holiday shopping earlier, a trend that likely contributed to the back-to-back declines in consumer spending and retail sales in the final two months of the year. Gift cards are counted in the spending figures when they’re used, not purchased, which could have boosted January’s figures.
Annual cost-of-living-adjustment: Known as the COLA, the annual cost-of-living adjustment for Social Security and Supplemental Security Income boosted incomes in January by the most in four decades. The 8.7% increase in benefits impacted about 70 million Americans.
Tax accounting: Friday’s data showed a large decline in personal taxes, providing a lift to disposable personal income. That likely also helped boost the savings rate in the month. Wells Fargo & Co. economists noted the “decline somewhat reflects BEA accounting rather than the true household experience.” Revisions to real disposable income could be coming down the pipeline as a result.
In the other direction, a decline in one-time payments issued by states to help offset rising prices and the end of the extended child-tax credit weighed on the overall income figures, offsetting the surge in Social Security incomes.
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