US consumer spending rebounds; drop in income and outbreak of COVID-19

WASHINGTON (Reuters) – US consumer spending rebounded to the highest level ever recorded in May, but the gains are not expected to be sustainable, with revenues falling and further declining as millions people lose their unemployment checks from next month.

The spike in spending announced by the Commerce Department on Friday is also threatened by an increase in cases of coronavirus in many parts of the country, including densely populated California, Texas and Florida. The rise in COVID-19 infections shook consumer sentiment in the second half of June. Confidence in the government’s economic policies fell to a low in June since President Donald Trump entered the White House.

The economy showed signs of a reversal after tough measures to slow the spread of respiratory disease pushed it into recession in February. Rentals, building permits, industrial production and orders for manufactured goods rebounded in May, recovering some of their historic losses.

“There are still huge pitfalls ahead for the economy,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania.

The Commerce Department said consumer spending, which accounts for more than two-thirds of US economic activity, jumped 8.2% last month. This is the largest increase since the government started following the series in 1959. Consumer spending fell 12.6% in April.

Economists polled by Reuters forecast spending to rise 9.0% in May. Spending was boosted by the reopening of many businesses after they closed in mid-March.

Consumers have increased their purchases of motor vehicles and leisure goods. They also boosted spending on healthcare and in restaurants, hotels and motels.

But personal income fell 4.2%, the most since January 2013, after surging 10.8% in April when the government issued one-time $ 1,200 checks to millions and increased benefits of unemployment to cushion the difficulties associated with COVID-19. The payments are part of an historic budget package worth nearly $ 3 trillion.

In another survey on Friday, the University of Michigan said its consumer confidence index fell to 78.1 from 78.9 in mid-June. Although sentiment increased from May, consumers in regions with record increases in coronavirus cases were less optimistic than residents in the Northeast, which could weigh on general mood in the coming months.

Wall Street stocks fell, under pressure from rising viral infections and the Federal Reserve’s decision to cap dividend payments from big banks and buy back stocks until at least the fourth quarter. The dollar appreciated against a basket of currencies. US treasury prices were higher.

LOW INFLATION

In May, incomes were increased by a reduction in public social benefits. The government will stop paying an additional $ 600 a week in unemployment benefits on July 31. Economists estimate that around 26 million people, two-thirds of whom are not eligible for regular 26-week unemployment benefits, would be left without an income.

About 30.6 million people, or about one-fifth of the workforce, received unemployment checks in the first week of June. Government transfers to households increased at an annualized rate of $ 1.1 trillion, up from $ 3 trillion in April.

Wages rebounded 2.7% after falling 7.6% in April. But the gains could collapse into record unemployment and rampant COVID-19 infections. Economists said the drop in income underscored the need for further government stimulus to avoid a so-called budget cliff on July 31.

“It is clear that the main force preventing things from collapsing is the increase in unemployment benefits,” said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania. “Without action, revenues could crater in August and spending will follow.”

Consumer spending in May was financed by savings, which fell $ 1.9 trillion. The savings rate fell to a still high level of 23.2% compared to a record 32.2% in April.

Historically high savings could support spending. Economists warn, however, that increased uncertainty could prompt consumers to focus and keep their incomes.

Inflation remained low in May, with food prices slowing and the cost of energy goods and services falling for the fifth consecutive month. The price index for personal consumption expenditure (PCE), excluding the volatile components of food and energy, edged up 0.1% after falling 0.4% in April.

FILE PHOTO: Buyers are seen outside a retail store as phase 1 of the New York reopening continues during the epidemic of coronavirus disease (COVID-19) in the Brooklyn neighborhood in New York, New York, United States, on June 9, 2020. / Photo taken on January 24, 2018 / REUTERS / Shannon Stapleton

During the 12 months to May, the so-called core PCE price index rose 1.0%, matching April’s gain. The core PCE is the Fed’s preferred measure of inflation for its 2% target.

After adjusting for inflation, consumer spending jumped 8.1% in May after falling 12.2% in April. So-called real consumer spending remained 11.2% below its pre-pandemic level, keeping economists’ expectations of the largest drop in consumer spending and gross domestic product in the second quarter intact since the great Depression.

Economists expect GDP to decline up to 46% annualized in the second quarter. The economy contracted at a rate of 5% during the quarter from January to March, the deepest slowdown since the great recession of 2007-2009.

Report by Lucia Mutikan; Editing by Chizu Nomiyama and Andrea Ricci

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