Covid-19 Stimulus Checks Likely Drove Record Rise in Household Income

Economists also project that income growth pushed up consumer spending by 4% last month, which would be the steepest month-over-month increase since last summer. Widespread vaccinations and the broader reopening of the economy will help the recovery endure after the effects of fiscal stimulus fade, economists say.

“If we have Covid-19 cases under control, that would ideally make way for us to reopen the services sector of the economy,” said

Pooja Sriram,

U.S. economist at Barclays. “That, in fact, is a crucial aspect of ensuring that this recovery continues.”

Stimulus payments included in the latest package propelled spending the most of all three rounds of pandemic stimulus checks, according to data-analytics company Earnest Research.

People who received stimulus money drove up total spending growth by 29 percentage points in mid-March compared with the same period in 2019, Earnest transaction figures show. That outpaced bumps of 23 and 22 points after the first and second stimulus checks, respectively.

The spending effect was larger this time because the checks were bigger and aligned with economic reopenings, said Zach Amsel, data analytics director at Earnest. Spending among stimulus recipients grew twice as fast in Pennsylvania, Texas and Florida compared with California and New York, according to Earnest, reflecting stronger stimulus effects in states that reopened faster.

“Local economies matter,” Mr. Amsel said. “If in Texas and Florida, restrictions were never as strict as New York and California, you saw that play out since April of last year.”

Consumer spending is the biggest factor behind economic growth in the U.S. Spending has held up solidly throughout the pandemic, as consumers ramped up purchases of goods, such as cars, home appliances and furniture. Spending on in-person services—such as restaurants, nail salons and air travel—was hit hard, but is picking up as people get vaccinated.

Robert Bornfriend, 76 years old, had taken about two international trips a year for much of the past decade. When the pandemic struck, the Wheaton, Ill., resident hunkered down at home for months, avoiding travel and dining out.

This year is shaping up to be different. Mr. Bornfriend, who is now fully vaccinated, recently ventured out to a restaurant for the first time during the pandemic to eat a trio of shrimp, skirt-steak and lamb tacos.

He also flew to Costa Rica earlier this month and is looking forward to a group tour of Sicily later this year. When he booked a river cruise through Holland and Belgium, Mr. Bornfriend opted for a treat: a cabin on the first-level deck.

“I’m willing to splurge a little bit more to maybe visit more places or upgrade my accommodations so I enjoy it more,” he said. “I feel like I lost a significant percentage of my remaining lifespan, and I want to make it up.”

As the economy reopens in the coming months, households will be primed to spend more of the savings they built up during the pandemic. Excess savings, or the extra sums of money that many Americans have stashed away since the virus struck, account for about 12% of gross domestic product in the U.S., according to Moody’s Analytics.

Wealthier households, which suffered fewer job losses during the pandemic, have run up the bulk of savings during the pandemic. Though they are more likely than lower-income households to treat the savings as wealth, instead of income to spend, many economists expect they will still spend lavishly this year to compensate for months of staying at home.

Strong consumer spending is one factor that will likely push up inflation in the near term. Companies may raise prices as a surge in demand outpaces their ability to hire and produce.

Economists surveyed by The Wall Street Journal forecast the personal-consumption expenditures index excluding food and energy, the Federal Reserve’s preferred inflation gauge, increased 1.8% in March from a year earlier. Such a rise would be up from a 1.4% year-over-year increase in February.

Price pressures that emerge from the reopening process are likely to be temporary, Fed Chairman

Jerome Powell

said at a press conference Wednesday.

“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,” Mr. Powell said. “Indeed, it is the Fed’s job to make sure that that does not happen.”

Write to Sarah Chaney Cambon at [email protected]