US consumer spending recovers, falling revenue is a threat

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 Commerce Department report on Friday added increases in home building permits, industrial production and orders for manufactured goods by suggesting that the economy was turning the corner after stringent measures to control the COVID-19 pandemic They put it into recession in February.

But incipient recovery is threatened by an increase in confirmed coronavirus cases in many parts of the country, including heavily populated California, Texas, and Florida.

“There are still great difficulties for the economy,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “Personal income and consumer spending are likely to be highly successful in the coming months, unless Congress provides more fiscal stimulus.”

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. The surge in spending last month reflected the reopening of many businesses after closing in mid-March to curb the spread of respiratory illness.

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.

Shares on Wall Street were trading lower, pressured by rising coronavirus infections and the move by the Federal Reserve to limit bank dividend payments and ban share buybacks until at least the fourth quarter. The dollar was stable against a basket of currencies. US Treasury prices rose.

WEAK INFLATION

The drop in income last month reflected a decrease in government welfare payments related to the pandemic.

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 totaled $ 1.1 trillion last month compared to $ 3 trillion in April.

Wages increased 2.7% after falling 7.6% in April. But with record unemployment, last month’s earnings will likely fail.

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 uncertainty amid rising COVID-19 infections could cause consumers to duck and keep their income.

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 PCE core index is the Federal Reserve’s preferred measure of inflation. The US central bank has an inflation target of 2%.

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.

That kept economists’ expectations about the sharpest drop in consumer spending and economic growth in the second quarter since the Great Depression intact.

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.