US consumer spending rebounded in March amid a surge in income as households received additional Covid-19 pandemic relief money from the government, building a strong foundation for a further acceleration in consumption in the second quarter.
Other data on Friday showed labor costs jumped by the most in 14 years in the first quarter, driven by a pick-up in wage growth as companies competed for workers to boost production.
The White House's massive $1.9t fiscal stimulus and rapidly improving public health are unleashing pent-up demand.
"While we aren't completely out of the woods yet, today's report shows the beginning of an economic rebound," said Brendan Coughlin, head of consumer banking at Citizens in Boston.
"Assuming no setback in the continued rollout of the vaccines, US consumers are well-positioned in the second half of the year to stimulate strong economic growth across the country."
Consumer spending, which accounts for more than two-thirds of US economic activity, increased 4.2 per cent last month after falling 1.0 per cent in February, the Commerce Department said.
The increase was broadly in line with economists' expectations.
The data was included in Thursday's gross domestic product report for the first quarter, which showed growth shooting up at a 6.4 per cent annualized rate in the first three months of the year after rising at a 4.3 per cent pace in the fourth quarter. Consumer spending powered ahead at a 10.7 per cent rate last quarter.
Most Americans in the middle- and low-income brackets received one-time $1,400 stimulus checks last month which were part of the pandemic rescue package approved in March.
That boosted personal income 21.1 per cent after a drop of 7.0 per cent in February.
A chunk of the cash was stashed away, with the saving rate soaring to 27.6 per cent from 13.9 per cent in February.
Households have amassed at least $2.2t in excess savings, which could provide a powerful tailwind for consumer spending this year and beyond.
The government's generosity and expansion of the Covid-19 vaccination program to include all American adults is lifting consumer spirits, with a measure of household sentiment rising to a 13-month high in April.
Wages are also increasing, which should to help to underpin spending when stimulus boost fades.
In a separate report on Friday, the Labor Department said its Employment Cost Index, the broadest measure of labor costs, jumped 0.9 per cent in the first quarter. That was the largest rise since the second quarter of 2007.
The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation as it adjusts for composition and job quality changes. Last quarter's increase was driven by a 1.0 per cent rise in wages, also the biggest gain in 14 years.
Wages in the accommodation and food services industry, hardest hit by the pandemic, soared 1.7 per cent.
Despite employment being 8.4m jobs below its peak in February 2020, businesses are struggling to find qualified workers as they rush to meet the robust domestic demand.
US stocks were lower after a recent rally. The dollar rose against a basket of currencies. US Treasury prices were higher.
Federal Reserve Chair Jerome Powell on Wednesday acknowledged the worker shortage saying "one big factor would be schools aren't open yet, so there's still people who are at home taking care of their children, and would like to be back in the workforce, but can't be yet."
Economists agree and expect the rising wages to contribute to higher inflation this year.
The strengthening demand and the dropping of last year's weak readings from the calculation lifted inflation last month.
The personal consumption expenditures (PCE) price index excluding the volatile food and energy component increased 0.4 per cent after edging up 0.1 per cent in February.
In the 12 months through March, the so-called core PCE price index increased 1.8 per cent, the most since February 2020.
The core PCE price index is the Fed's preferred inflation measure for its 2 per cent target, which is a flexible average.
Powell reiterated on Wednesday that he expected higher inflation will transitory. But some economists have doubts.
"While labor costs are hardly getting out of hand, there is clearly more wage pressure in the economy at present than the early stages of the past cycle," said Sarah House, a senior economist at Wells Fargo in Charlotte, North Carolina.
"Stronger labor cost growth even before the economy hits full employment is a reason to think that even after the reopening-fueled pop this year, inflation is likely to settle above the anemic rate of the past cycle."
Households last month spent more on motor vehicles and recreational. They also visited restaurants.
When adjusted for inflation, consumer spending rebounded 3.6 per cent last month after falling 1.2 per cent in February.
The rebound in the so-called real consumer spending sets consumption on a higher growth trajectory heading into the second quarter.
Most economists expect double-digit growth this quarter, which would position the economy to achieve growth of at least 7 per cent, which would be the fastest since 1984. The economy contracted 3.5 per cent in 2020, its worst performance in 74 years.