By Lucia Mutikani
WASHINGTON (Reuters) – US consumer spending rebounded in the largest amount on record in May, but earnings are unlikely to be sustainable as revenue will decline and is expected to further decrease as Millions lose their unemployment checks starting next month.
The surge in spending reported by the Commerce Department on Friday is also threatened by a jump in coronavirus cases in many parts of the country, including densely populated California, Texas and Florida. Rising COVID-19 infections affected consumer sentiment in the second half of June. Confidence in the government’s economic policies fell in June to the lowest level since President Donald Trump entered the White House.
The economy has been showing signs of improvement after severe measures to curb the spread of respiratory disease pushed it into recession in February. Recruitment, home building permits, industrial production and orders for manufactured goods recovered in May, recovering some of its historical losses.
“There are still great difficulties 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 America’s economic activity, increased 8.2% last month. That was the biggest increase since the government began following the series in 1959. Consumer spending fell a record 12.6% in April.
Economists polled by Reuters had forecast a spending increase of 9.0% in May. Spending was fueled by the reopening of many companies after it closed in mid-March.
Consumers stepped up purchases of motor vehicles and recreational items. They also increased spending on health care and in restaurants, hotels, and motels.
But personal income fell 4.2%, the most since January 2013, after rising a record 10.8% in April, when the government issued $ 1,200 one-time checks to millions of people and increased benefits. unemployment to cushion the difficulties of COVID-19. The payments are part of a nearly $ 3 trillion historical tax package.
In a separate poll conducted on Friday, the University of Michigan said its consumer sentiment index dropped to a reading of 78.1 from 78.9 in mid-June. Although sentiment has increased since May, consumers in the regions with record increases in coronavirus cases were less optimistic relative to residents of the northeast, which could affect overall mood in the coming months.
Shares on Wall Street fell, pressured by mounting virus infections and the move by the Federal Reserve to limit large bank dividend payments and ban share buybacks until at least the fourth quarter. The dollar rose against a basket of coins. United States Treasury prices were higher.
WEAK INFLATION
Revenue in May was affected by a decrease in government welfare payments. The government will stop paying an additional $ 600 a week in unemployment benefits on July 31. Economists estimate that about 26 million people, two-thirds of whom do not qualify for regular 26-week state unemployment insurance benefits, would be without income.
About 30.6 million people, about a fifth of the workforce, were cashing unemployment checks in the first week of June. Government transfers to households increased at an annualized rate of $ 1.1 trillion compared to $ 3 trillion in April.
Wages recovered 2.7% after falling 7.6% in April. But earnings could fail amid record unemployment and raging COVID-19 infections. Economists said the drop in revenue underscored the need for additional government stimulus to avoid a so-called fiscal cliff on July 31.
“It is clear that the main force to prevent things from falling apart is the highest unemployment compensation,” said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania. “Without action, revenue could collapse in August and spending will continue.”
Consumer spending in May was financed with savings, which decreased by $ 1.9 trillion. The savings rate fell to a still high 23.2% from a record 32.2% in April.
Historically, high savings could support spending. However, economists warn that increased uncertainty could prompt consumers to duck and keep their incomes.
Inflation remained weak in May, with moderation in food prices and a decrease in the cost of energy goods and services for the fifth consecutive month. The Personal Consumption Expense Price Index (PCE), excluding volatile food and energy components, rose 0.1% after falling 0.4% in April.
In the 12 months to May, the so-called PCE basic price index rose 1.0%, matching April’s profit. The Basic PCE Index is the Fed’s preferred measure of inflation for its 2% target.
When adjusted for inflation, consumer spending rose a record 8.1% in May after falling 12.2% in April. Still, so-called real consumer spending remained 11.2% below its pre-pandemic level, keeping economists’ expectations about the steepest drop in consumer spending and gross domestic product in the second intact. quarter since the Great Depression.
Economists expect GDP to decline at an annualized rate of 46% in the second quarter. The economy contracted at a rate of 5% in the January-March quarter, the worst recession since the Great Recession 2007-09.
(Report by Lucia Mutikani; Edition by Chizu Nomiyama and Andrea Ricci)
