Americans have a little more money to spend, and they're spending all of that and then some.
In February, consumer spending increased by more than three times as much as personal income, growing by $86.0 billion, according to figures released today by the Commerce Department. That's an 0.8 percent increase over January, the largest bump in seven months. Personal income also rose, but not as dramatically, at 0.2 percent, or $28.2 billion, and disposable personal income also rose by 0.2 percent.
Pent-up demand is one key reason for the uptick in spending, says Mark Lamkin, CEO of Lamkin Wealth Management in Louisville, Ky. After years of economic hardship, he says, an improvement in fortunes has spurred people to go out and buy what they've bene putting off. "American consumers are tired of feeling bad. Consumer confidence continues to climb, and they're going to spend money because it makes them feel good," he says.
The warmer weather also likely contributed to consumers' warmer moods, says Chris Christopher, a senior principal economist at IHS Global Insight, as it helped them to absorb other hits to their pocketbooks, like growing gas prices. "The higher gas prices are not having such an impact because people are saving a little bit, quite a bit maybe, on household electricity and heating bills," he says.
The recent national hiring spree likely contributed to the spending spree as well. Thanks to three months of robust hiring, with an average of nearly 245,000 jobs per month from December through February, more Americans are earning paychecks. All of that additional spending fuels the economy, potentially creating more jobs.
Of course, there are downsides to rapid spending growth. The additional consumer spending may eat into Americans' rainy day funds, even as it greases the wheels of the economy, reducing their padding for future economic shocks. The personal saving rate fell from 4.3 percent of disposable income in January to 3.7 percent in February.
And price increases also mean that, while more Americans are earning paychecks, all of that additional income is worth slightly less than it was in January. When adjusted for price changes, disposable personal income fell by 0.1 percent. Inflation-adjusted consumer spending still posted strong growth, though, at 0.5 percent.
"The obvious downside [to today's report] is the significant reduction in saving, which means consumers don't have the wherewithal to continue growing at this pace without a significant pickup in income growth," says Scott Hoyt, senior director of consumer economics at Moody's Analytics.
A less obvious downside comes from the warm weather. As a warmer-than-usual winter leads to spring, economic indicators could cool in April and May.
"The seasonal adjustment factors the government uses assume some bad weather in February, and since we didn't get any of that, it may have lifted things beyond what's really going on," says Hoyt. "As the weather normalizes, we'll get some payback on the downside."