Washington Insider-- Tuesday

Rising Income and Spending

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

US Biofuels Interests Eye UK Market As Country Up Biofuel Use

The United Kingdom will increase the share of ethanol in its motor fuel to 10%, up from a current 5%, with the country saying the move is aimed at reducing the impact of driving in the country. The UK Department of Transport said the change could reduce carbon dioxide emissions by 750,000 metric tons per year, the equivalent of taking 350,000 cars off the road.

U.S. biofuel groups welcomed the move, hoping that it translates into additional demand for U.S. ethanol as the UK biofuel infrastructure needs to be increased to meet the rising demand. The U.S. exported around 600,000 barrels of ethanol to the UK in 2020, down about 55,000 barrels from 2019 levels as COVID restrictions limited travel and gasoline demand in the UK.

Data from the UK indicated that overall ethanol consumption was at 4.7 million barrels in 2019.

The hoped-for rise in U.S. ethanol exports to the UK would be a welcome demand development, but may not be a sustained market given an expected push to bolster the biofuel infrastructure in the UK.

DMC Payments Triggered For More Coverage Levels In January

The national average margin for January 2021 is at $7.14 per cwt., which USDA said will mean Dairy Margin Coverage (DMC) payments are triggered for January.

Dairy operations that elected Tier 1 margin coverage levels $9.50, $9.00, $8.50, $8.00, $7.50 per cwt. and Tier 2 margin coverage levels at $8.00, $7.50, will be issued a payment.

DMC payments are triggered when the difference between the national all milk price and the national average feed cost falls below the margin trigger selected by producers.

Enrollment in DMC has fallen below expectations even as the program has triggered payments for some of the coverage levels at least the last two months.

Washington Insider: Rising Income and Spending

The New York Times reported last week that the American economic recovery came perilously close to falling off a cliff at the end of last year — but that government aid arrived barely in time to prevent a disaster — and possibly paved the way for a dynamic rebound.

Personal income surged a remarkable 10% in January, the Commerce Department reported on Friday. Spending increased last month, too, by a healthy 2.4%, largely fueled by a rise in purchases of goods.

The report was the latest sign of the economy's slow but steady march forward after a series of setbacks.

Yet the data also underscored the extent to which government aid is buoying the economy. The rise in income last month was almost entirely attributable to the $600 government relief checks approved in December and to unemployment insurance payments, the Times said. And while spending ticked up, purchases of services remained depressed as the pandemic continued to weigh heavily on the leisure and hospitality industries even as coronavirus cases fell.

“Technically, you could say we're recovering,” said Diane Swonk, chief economist for the accounting firm Grant Thornton. “But the patterns in both income and spending point out the fragility of the recovery without aid.”

That the economy remains reliant on government aid is all the more resonant as Democrats in Washington work to push through President Biden's $1.9 trillion relief measure, which would provide a round of $1,400 checks that could further power consumer spending.

Although the new data indicated that the recovery is still fragile, it provided fresh evidence that it is no longer in danger of moving in reverse, a trend also seen in recent reports on retail sales and orders of durable goods.

The encouraging data led Morgan Stanley on Friday to raise its forecast of first-quarter economic growth to 2% (8.1% on an annualized basis) from 1.8%. Before Congress passed the round of aid that produced the January checks, many economists thought GDP might shrink in the first quarter.

There is a possible downside to a robust, stimulus-powered recovery as economists increasingly warn that inflation could become a problem. That would imply a change of posture from the Fed and would be seen as bad news for stocks — and recent trading has been turbulent this week as investors react to recent sudden moves in bond yields.

But the report on Friday gave no indication that inflation was spinning out of control. Consumer prices were up 1.5% in January from a year earlier, well below the Fed's 2% target.

On Thursday, John Williams, the president of the Federal Reserve Bank of New York, said that “fiscal support, combined with highly favorable financial conditions and steady progress on vaccinations, are all reasons to be optimistic the economy will experience a strong recovery this year,” he said. “With our economy and the global economy still far below full strength, I expect underlying inflationary pressures to remain subdued for some time.”

The January data from the Commerce Department showed that although income was up 10% over all, wages rose only 0.7%. And spending reflected the pandemic's disruption to consumer behavior as spending on goods rose 5.8%, while spending on services was up only 0.7%.

There was also a “cautionary note” on Friday from the University of Michigan's February index of consumer sentiment, which declined from the previous month. The report said economic expectations had diminished particularly among households making less than $75,000.

Still, many economists are now predicting a rebound that is stronger than once seemed possible, a view that the Commerce Department report on Friday bolstered.

The Commerce Department report showed that households had $3.9 trillion in savings in January, up from $2.3 trillion in December and $1.4 trillion last February, before the pandemic. The jump in personal income in January was the largest since April, when the figure rose 12.4 percent, lifted by nearly $3 trillion in government transfer payments. That was mostly in the form of $1,200 checks that millions of households received from the federal government.

That cash stockpile could grow even larger if Congress passes another round of aid, as now seems probable. But as the pandemic ebbs, Americans are likely to start spending again — turning the built-up savings into fuel for the economy.

“We just think there's going to be this huge pent-up demand for services that's going to be funded by that excess savings,” Bryson said.

Thus, the year ahead could be bumpy, with consumer spending gradually warming up in the spring and summer as the combination of a new round of stimulus, reduced infections and vaccine distribution gets people and their money into greater circulation, said Gregory Daco, chief U.S. economist at Oxford Economics.

“We know what is restraining consumer spending,” he said—namely the health crisis and, for some families, the means. “And what the January report reveals is that if both of these factors are alleviated in terms of constraints, then consumers will spend, and then the recovery will be strong.”

So, we will see. Many economists feel that there are too many unknowns just now to allow confident outlook analysis, although many can be expected to try. These are trends producers should watch closely as the continuing war on the COVID virus continues, Washington Insider believes.

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