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Consumer spending will increase by 5.6% in June, but the recovery already seems to be slowing

The numbers: Americans increased spending on a variety of goods and services in June as more people returned to work and massive infusions of state aid poured into the economy, but progress seems to have slowed recently following a recent spike in coronavirus cases.

Personal expenses increased by 5.6% in June, the government said Friday, after a revised advance of 8.5% in May.

Revenues were down 1.1% – slightly more than expected – as a result of reduced federal aid to families.

The government sent most families one-off incentive checks in May as part of Washington’s unprecedented effort to keep people working or provide them with more generous unemployment benefits during the worst health crisis in a century.

Read:Economy suffered a massive dip of 32.9% in the second quarter, indicating a long-term recovery

Meanwhile, closely monitored inflation corresponded to the biggest increase in three years, largely due to higher gasoline prices. The PCE index, the Federal Reserve’s favorite inflation barometer, rose by 0.4%.

However, the annual inflation rate was quite low at less than 1%.

What happened: Consumers spent more on new cars and trucks, clothing, petrol and recreation as the economy was largely reopened. Americans also spent more on medical care when they returned to hospitals for treatments unrelated to the coronavirus.

Still, spending remains well below precision, with so many Americans out of work and others concerned about their financial security.

Read:Unemployment claims are rising for the second consecutive week as economic activity in the US slows

The extremely high savings level fell from 19% to 24% in May to 19%. Households have reached record levels in case the economy or their own situation deteriorates.

Inflation, in turn, currently poses little threat to the economy.

While the cost of some commodities, such as gas and food, has risen, most companies have had to lower the prices of goods and services to generate sales after a collapse in demand early in the pandemic.

Read:Consumer confidence declines in July and indicates a stronger economic recovery

The inflation rate has risen to 0.8% from 0.5% in the past 12 months, according to the PCE index. Still, it’s well below the January rate of 1.9%.

A separate measure of inflation that eliminates food and energy, known as core rates, rose 0.2% in June. However, it has only risen 0.9% in the past year and is almost the lowest level since the Great Recession a decade earlier.

See: MarketWatch Economic calendar

Big picture: The reopening of the economy saw a recovery in May and early June when millions of Americans returned to work. Yet another major outbreak of coronavirus cases undermined the recovery of momentum, and several measures show that economic growth slowed in July.

What will likely determine whether growth is picking up again is whether Washington is extending unemployment benefits and other measures. They expire this week. Without more help, say economists, the recovery is likely to lose more steam.

Read: “A massive welfare economy” – federal aid prevents an even steeper GDP collapse

Market response: The Dow Jones Industrial Average DJIA,
-0.85%
and S&P 500 SPX,
-0.37%
would rise slightly in Friday trading.

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