Americans’ paychecks are shrinking, but their spending is skyrocketing. Hey?

06/26/2020 USA


The United States savings rate stood at 23.2% in May, compared to 32.2% in April.

So far so good. Many economic indicators recorded sharp falls in April, the height of the blockade, and recovered in May, which made the data very choppy. It seems that consumer spending also fits that pattern. That’s important because about two-thirds of America’s economic growth is fueled by consumer spending.

But the recovery story is not that simple.

While spending recovered, personal income fell 4.2% and disposable income decreased 4.9%.

The main reason for the drop: a lower level of government social benefits than were paid to Americans. Most people have already cashed their stimulus checks, so the sugar fever is disappearing. The Trump administration is considering a second round of stimulus checks, but nothing has yet been decided.

That decline was partially offset by more unemployment claims being paid in May, the BEA said. Under the CARES Act, the government expanded unemployment benefits, including adding $ 600 per week. But so far, the additional cash has only to be paid until the end of July.

For some, the enhanced benefits currently pay more than their previous wages.
Traditionally, lawmakers fear that overly generous unemployment benefits prevent people from wanting to return to work. But in the pandemic recession, the textbook may be thrown out the window.
While claims for benefits are slowly declining, with 2.5 million jobs added to the economy in May, and another 3 million expected in next week’s June jobs report, millions of Americans continue to depend on benefits for make ends meet. The unemployment rate remains above the level reached during the financial crisis and this week’s Labor Department report showed that nearly 20 million people applied for benefits for at least two weeks following June 13.

This means that consumers, the primary driver of economic growth in the United States, will remain limited in their spending. That’s why “cutting off political support that helps households keep spending is a terrible idea, both for the well-being of these households and for macroeconomic stabilization,” said Josh Bivens, director of research at the Institute for Economic Policy.

Bivens believes that extending the additional $ 600 in weekly unemployment benefits through the middle of next year “would provide an average quarterly boost to gross domestic product of 3.7% and the employment of 5.1 million workers.”

Meanwhile, the University of Michigan reported that consumer sentiment declined in the second half of June. Even though sentiment had increased, consumers believe that economic growth is more closely related to fighting the virus.

“Unfortunately, confidence in the government’s economic policies has dropped in the June poll to its lowest level since Trump took office,” said Richard Curtin, chief economist for the consumer survey. “The need for new aid programs is urgent and will be best achieved before national elections dominate the debate.”

Sentiment improved more among survey participants in the Northeast, where a slower reopening is expected to lead to fewer new infections.

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