WASHINGTON (AP) – US consumers increased spending in May by a sharp 8.2%, partially wiping out record declines over the past two months, against an economy likely to contract the most strongly this quarter.
Last month’s recovery in consumer spending followed a decline in spending by 6.6% in March and 12.6% in April, when the viral pandemic shut things down, resulted in millions of redundancies and brought the economy into recession . Since then, many companies have reopened, drawing consumers back to shops and restaurants and restoring lost jobs.
Friday’s Commerce Department report found that Americans boosted spending in May, despite a 4.2% drop in personal income, which was up 10.8% last month. Income had skyrocketed in April with support of billions of dollars in support through government payments in the form of unemployment support and one-off incentive checks of $ 1,200. In May, those stimulus checks were no longer counted as income for most people.
In addition to the unemployment support that states provide to the 30 million unemployed Americans, the federal government provides $ 600 a week in additional benefits. Federal money has pumped nearly $ 20 billion a week into the economy and has helped many unemployed people survive. But the $ 600 a week in aid expires after July, and Trump officials have said they are against renewal.
Without incentives or an extension of unemployment support, it is unclear whether consumers will continue to spend freely. In a testimony to Congress last week, Federal Reserve Jerome Powell said that he thought Congress should consider providing some form of extended unemployment benefits beyond their typical six-month period, assuming unemployment towards the end of the year is likely to be quite high.
Last month’s surge in consumer spending also coincides with a sudden wave of coronavirus cases, forcing states and companies to consider scaling back or even reversing reopenings. If the pandemic escalated to a new round of widespread business shutdowns, fewer people would shop, travel, eat out, or attend major events. That would reverse any recovery in spending and further weaken the economy.
Consumer spending is monitored closely as it accounts for about 70% of economic activity. Despite increased spending in May, economists estimate that the economy, measured by gross domestic product, shrinks by about 30% year-on-year in the April-June quarter, after shrinking 5% in January-March. That would be by far the worst contraction in the U.S. since registration began in 1948.
In February, the economy fell into a deep recession, according to the National Bureau of Economic Research, the association of economists, the official referee of recessions in the United States. Most analysts expect the economy to recover in the second half of this year before potentially hitting pre-pandemic levels in late 2021 at the earliest.
The Trump administration is predicting a relatively quick and strong economic recovery from this summer. Most private economists are much less optimistic. And they warn that if the pandemic worsens and forces a second round of company closings, it would further reduce the labor market and the economy. The damage can be serious.
A hopeful sign in the meantime comes from data collected from Chase Bank credit and debit cards. It shows that consumers have increased their expenditure gradually but consistently since the government distributed the promotional checks in mid-April.
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