Stimulus Update: Will U.S. Consumer Spending Provide a Much-Needed Stimulus?

Predict the same doom and gloom often enough and it will eventually come true.

When it comes to the economy, the past two years have been dizzying. While there have been plenty of predictions of doom, gloom, and a severe recession, nothing has come to pass just yet. That's not to say that the U.S. economy won't hit bumps in the road as it continues to rebound from COVID-19. Still, glimmers of hope abound.

Positive signs

For example, home builders feel optimistic about the housing market in 2023. While prices are still too high, inflation has begun to cool, thanks primarily to the number of interest rate hikes initiated by the Federal Reserve. And in January, U.S. consumer spending surged by 1.8%. When adjusted for inflation, consumer spending was up 1.1%, the most significant increase in nearly two years.

Manufactured goods received a significant boost from the increase in spending. Among the big-dollar items Americans purchased were vehicles, household furnishings, and recreational equipment. We also bought more clothes and spent more on healthcare and recreation. Spending on services rose 1.3% as more of us hit bars and restaurants after the new year.

This surge in consumer spending is especially surprising because it comes amid so many predictions of doom and gloom. In fact, the report from the Commerce Department on Feb. 20 indicates that the economy is nowhere near a recession.

Mixed messages

Another mixed message we've recently dealt with has to do with the unemployment rate. One reason economists predict a recession in 2023 is because of expected job cuts. However, job growth in January was robust, and the unemployment rate was lower than it's been since Nixon was in the White House.

Every dollar put back into the economy acts as a stimulus, keeping small businesses open and drawing more tax revenue into local governments. Those tax dollars build schools, repair roads, and make life more pleasant for area residents.

Better understanding of how it works

As we each did our best to get through the pandemic, we learned things along the way. For example, we now know that direct payments to our bank accounts were meant to accomplish two things: Help families struggling to pay bills and stimulate the economy.

In 2021 alone, stimulus checks and monthly tax credit payments lifted 19 million out of poverty, pushing the child poverty rate to a historic low. The answer as to whether direct payments stimulated the economy is more nuanced. Those with the least money in the bank at the beginning of the pandemic were the most likely to spend their checks, which did help stimulate the economy, while funds saved or used to pay debt did little to help.

While a recession did hit in the first half of 2020, it ended up being the shortest on record, at only two months. Some economists credit stimulus checks with preventing a second, more severe recession. Still, stimulus checks are credited with saving the economy from a much higher unemployment rate and a double-dip recession.

According to Reuters, some economists expect payback in February. While they may be right, recent consumer behavior indicates they may just be wrong.