Consumer spending rebounds
Report shows 8.2% rise in May, but 4.2% drop in personal income.
Consumer spending rebounded 8.2% in May as many states began lifting stay-at-home orders and businesses reopened, according to the U.S. consumer report released Friday.
The jump comes despite a 4.2% drop in personal income, which the Commerce Department report says reflects a decrease in government social benefits and economic recovery program funds for individuals in response to the covid-19 pandemic. Personal incomes soared in April, thanks to those $1,200 stimulus checks, but much of that money was spent by May.
Unless Congress approves more assistance, experts like MUFG economist Chris Rupkey, expect personal incomes to drop even more: Millions of Americans will lose $600 a week in supplemental unemployment benefits when the federal program expires at the end of July.
The government’s $1,200 checks are long gone and the extra $600 a week in jobless benefits soon will be, Rupkey said in an email, “pulling the rug out from under this fragile economic recovery, as there won’t be any money left to support unemployed workers and growth will downshift to a slower speed.
“Massive job losses with no paychecks will hit consumer spending hard in the months to come, and once the public’s pent-up demand purchases following the lockdown are made, economic growth could simply peter out,” he said.
Consumer spending fell 6.6% in March and 12.6% in April, when the pandemic forced much of the economy into hibernation and set off a recession that caused more than 40 million layoffs. Americans spent more on health care, as well as recreational goods and food services as consumers did more dining and traveling.
Auto sales showed signs of recovery after crumbling in April, when many dealerships were shuttered, CNBC reported. Expected new vehicle sales closed in on 1.1
million.
But it’s unclear how much recovery that consumer spending and personal income will boost in June after February’s tumble into recession, especially with what health experts view as the second wave of covid-19 sweeping across the U.S.
The tumultuous labor market is plagued by health concerns, as coronavirus infections surged this week in states like Arizona, Texas and Florida, prompting pauses on reopenings and rehirings and sending customers back home.
Restaurants in states like Florida and Arizona are closing again after workers test positive for coronavirus, and it’s unclear if economic sectors that typically warrant one-time purchases like the auto industry or home renovations will be able to sustain themselves as the summer progresses.
“The recession may have ended for economic growth, but the recession in the labor markets still rages on,” Rupkey said. “Consumers and businesses are still cautious where spending at the shops and malls and new orders for long-lived capital equipment remain well off the best economy in 50 years levels at the start of the year.”
Consumer spending is closely watched because it accounts for about 70% of economic activity. Despite the increased spending in May, economists have estimated that the economy, as measured by the gross domestic product, is contracting at a roughly 30% annual rate in the April-June quarter after shrinking at a 5% rate in the January-March period. That would be, by far, the worst U.S. quarterly contraction since record-keeping began in 1948. Economists cautioned against reading much into last month’s surge in consumer spending.
They noted that the increase followed two record declines and that it still left spending 11% below its pace before the pandemic hit.
“Amid rapidly rising infections across many states, risks to the outlook are dangerously tilted to the downside,” Gregory Daco, chief U.S. economist at Oxford Economics, said in a research note.