WASHINGTON (Reuters) – US consumer spending rose for the second month in a row in June, setting consumption for a third-quarter rebound, though the recovery could be limited by a resurgence in COVID-19 cases and the end of expanded unemployment benefits.
Concerns about skyrocketing coronavirus infections and expiring unemployment benefits affected consumer sentiment in July, other data showed on Friday. Solid consumer spending is critical to reviving the economy after taking its biggest hit since the Great Depression in the second quarter.
“The June data confirms the strong initial phase of the recovery, but we warned that the rearview mirror economy could take us over a cliff,” said Gregory Daco, chief economist at Oxford Economics in New York. “Low-income families have almost recovered their pre-COVID spending levels backed by strong fiscal aid, but with the expiration of numerous assistance programs and a poorly managed health crisis that limits spending on services, the second phase of recovery will probably be much slower. ”
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 5.6% last month after a record jump of 8.5% in May as more companies reopened, the department said trade.
Consumers boosted purchases of clothing and footwear. They also spent more on health care, restaurants, and hotel and motel accommodation, though service outlays remained lackluster due to precaution caused by the virus.
Economists polled by Reuters had predicted that consumer spending would advance 5.5% in June. When adjusted for inflation, consumer spending increased 5.2% after an 8.4% increase in May.
The data was included in Thursday’s advance report of gross domestic product for the second quarter, which showed the economy contracted at a record annualized rate of 32.9%, the biggest decline since the government began keeping records in 1947. The Consumer spending collapsed at a record 34.6%.
With June’s rise, consumer spending withdrew from April’s deep hole, but remains 6.9% below its pre-pandemic level. This places spending on a path of higher growth towards the July-September quarter.
But the explosion of COVID-19 infections, especially in the densely populated southern and western regions, where authorities in affected areas are closing businesses again and pausing to reopen, is casting doubt on the magnitude of the expected increase in spending. of the consumer in the third quarter.
Additionally, tens of millions of Americans unemployed at midnight on Friday will lose $ 600 in additional weekly unemployment benefits after the White House and Congress failed to reach an agreement to extend the supplement, which has allowed them to pay rent and buying food, among other expenses. .
A separate report from the University of Michigan on Friday showed that its consumer sentiment index fell to a reading of 72.5 this month from 78.1 in June.
Shares on Wall Street were mixed. The .DXY dollar held steady against a basket of currencies. Short-term US Treasury bond prices were slightly higher.
Chart: Unemployment benefits and total personal income: here
ALL EYES AT THE CONGRESS
The additional unemployment checks are worth around $ 75 billion per month and accounted for almost 5% of personal income in June. The staggering 30.2 million Americans received unemployment checks in the week ending July 11. Although government welfare payments have declined after jumping 110% in April, unemployment benefits increased 8.5% in June.
“If Congress does not rapidly extend these programs, and in light of the recent loss of momentum in the economy, the impact on household well-being and economic activity may be severe,” said Steven Friedman, senior macroeconomist at MacKay Shields in New York. “Strong federal support for households is likely to be necessary until the virus is contained.”
Government transfer payments decreased 8.9% last month, leading to a 1.1% drop in revenue, in addition to the 4.4% drop in May. Wages rose 2.2% after recovering 2.6% in May. With the unemployment rate at 11.1% and COVID-19 slowing the recovery in the labor market, wage growth could slow further.
A third report from the Labor Department on Friday showed the smallest wage increase in five years in the second quarter.
Historically, high savings could keep consumer spending backed, as lawmakers and the Trump administration seek a deal to extend enhanced unemployment benefits.
Consumers saved $ 1.3 billion in the past three months. Savings financed spending last month, dropping the savings rate to a still high 19% from 24.2% in May.
While higher prices for food and energy goods and services raised monthly inflation last month, the trend was muted.
The Personal Consumption Expense Price Index (PCE) excluding volatile food and energy components increased 0.2%, matching the gain for May. In the 12 months to June, the so-called PCE basic price index rose 0.9% after increasing 1.0% in May. The basic PCE index is the preferred measure of inflation for the Federal Reserve’s 2% target.
“This should allow the Fed to be as expansive as it wants without inflationary consequences,” said David Berson, chief economist at Nationwide in Columbus, Ohio.
The central bank of the United States kept the interest rates near zero on Wednesday and promised to continue injecting money into the economy.
Lucia Mutikani’s report; John Stonestreet and Paul Simao edition
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