US consumer spending increased 8.2%, partially erasing the record drop

WASHINGTON (AP) – American consumers increased spending by a record 8.2% in May, partially erasing huge declines in the previous two months, in the context of an economy that is likely to be slowing down at its fastest pace recorded this quarter.

The pickup in consumer spending last month followed a record drop in spending of 6.6% in March and 12.6% in April, when the viral pandemic closed businesses, forced millions of layoffs and led the economy into a recession. Since then, many companies have reopened, luring consumers to stores and restaurants and restoring some lost jobs.

The Commerce Department report on Friday showed Americans increased their spending in May despite a 4.2% decline in personal income, which had soared 10.8% the previous month. Revenue rose in April due to the strength of billions of dollars in support through government payments in the form of unemployment aid, as well as one-time $ 1,200 stimulus checks. In May, these stimulus controls were no longer counted as income for most people.

In addition to unemployment assistance that states provide to the 30 million unemployed Americans, the federal government provides $ 600 per week in fringe benefits. Federal money has injected nearly $ 20 billion a week into the economy and has allowed many unemployed to stay afloat. But the $ 600 a week in aid will expire after July, and Trump administration officials have said they oppose an extension.

Without stimulus controls or an extension of unemployment aid, it is unclear whether consumers will continue to spend freely. In testimony to Congress last week, Federal Reserve Jerome Powell said he thought lawmakers should consider providing some form of unemployment benefits extended beyond their typical six-month period, on the assumption that unemployment will likely remain quite high for the end of the year.

The surge in consumer spending last month also coincides with a surge in coronavirus cases that is forcing states and businesses to consider reducing or even reversing reopens. If an escalation of the pandemic forces another round of widespread business closings, fewer people would shop, travel, eat out, or attend major events. That would reverse any spike in spending and further weaken the economy.

Consumer spending is closely watched because it represents around 70% of economic activity. Despite the increase in spending in May, economists have estimated that the economy, measured by gross domestic product, is contracting at an annual rate of about 30% in the April-June quarter after shrinking to a rate of 5 % in the January-March period. That would be by far the worst quarterly contraction in the US since record keeping began in 1948.

Economists cautioned against reading too much about last month’s surge in consumer spending. They noted that the increase followed two record declines and that it still stopped spending 11% below its pace before the pandemic.

“Amid the rapid rise in infections in many states, the risks to prospects are dangerously tilted to the downside,” said Gregory Daco, chief economist at Oxford Economics in the United States, in a research note.

Friday’s report showed that among the categories for which consumers increased spending in May, the biggest increase, a jump of 29%, was for durable goods, led by purchases of cars and recreational vehicles. Spending on non-durable goods, which are items such as food and clothing, increased by almost 8%.

And spending on services, from cell phone contracts to hospital visits, increased more than 5%. The increase in the service sector was led by spending on medical care. That spending category had been reduced before May because of limits imposed on elective surgery as hospitals focused on the initial increase in COVID-19 patients.

The 4.2% drop in revenue last month was the biggest drop since 2013. It reflected that economic stimulus controls and other government emergency benefits fell by $ 1.1 billion annualized in May after rising $ 3 billion in April, when most of the payments were distributed.

Inflation, measured by an indicator linked to consumer spending, rose a meager 0.1% in May, the report showed. Inflation last year was just 0.5%, well below the Federal Reserve’s 2% annual target.

In February, the economy fell into a deep recession, according to the National Bureau of Economic Research, the association of economists who is the official arbiter of recessions in the United States. Most analysts expect the economy to recover in the second half of this year before potentially regaining its pre-pandemic level in late 2021 at the earliest.

The Trump administration predicts a relatively fast and robust economic rebound starting this summer. Most private economists are much less optimistic. And they warn that if the pandemic escalates and forces a second round of business closings, it would further delay the job market and economy. The damage could be serious.

Meanwhile, a sign of hope comes from data compiled from Chase Bank’s credit and debit cards. Demonstrates that consumers have gradually but steadily increased their spending since the government distributed the stimulus checks in mid-April.