U.S. Consumer Spending Rebounded in May, but Virus Surge Poses Economic Threat
Date: Friday, June 26, 2020
Source: The Wall Street Journal
Personal consumption increased at record 8.2% pace from the month before
Americans increased spending at a record pace in May, helping the economy dig out of a severe recession, but a new rise in virus infections threatens the nascent recovery.
Personal consumption—how much Americans spent on goods and services—rose 8.2% in May from a month earlier, the Commerce Department said Friday. That was more than double the prior all-time high since record-keeping began in 1959.
Household spending on long-lasting items like cars, refrigerators and sofas drove the growth. Spending on services also climbed.
Consumer spending, which represents more than two-thirds of economic demand in the U.S., remained far below prepandemic levels—down 12% from February. It isn’t clear if Americans will continue to spend at May’s pace. One factor that likely drove the boost was a surge in money from federal stimulus checks and unemployment benefits.
“Consumer spending sprung back to life in May as the nation reopened,” said Gregory Daco, economist at Oxford Economics, in a note to clients. “But, don’t be fooled, the rebound was only partial and largely supported by April’s massive fiscal stimulus injection—consumers are still fearful.”
Household incomes had soared in April mainly because of the stimulus money but fell 4.2% in May. Incomes were still up 3.8% compared with February, a sign that while spending remains down since the pandemic began, household finances are holding up—for now. Americans are still saving a big chunk of their money: The personal savings rate stood at a historically high 23.2% in May, down from 32.2% in April but up from February’s 8.4%.
This spring’s boost in personal income will likely be a one-off as aid programs expire, unless Congress approves new assistance. Millions of households in April received stimulus checks, up to $1,200 for individuals and $2,400 for couples. Some also received $600 a week in unemployment insurance on top of their normal jobless benefits. Research shows many Americans have spent a chunk of that money.
The unemployment rate, at 13.3% in May, remains near the highest level since the Great Depression. Meanwhile, new virus infections have picked up in 33 states recently, a Wall Street Journal analysis showed this week, and some businesses that reopened have shut back down. Texas on Thursday paused its reopening plans as cases and hospitalizations rose there.
“The outlook still heavily depends on the public-health situation, which is still quite uncertain,” said Constantine Yannelis, a University of Chicago economist.
For now, some Americans appeared ready to spend on things like cars, travel, and home furnishings after months of being holed up.
Janece Kleban, a 37-year-old small-business owner from Washington, D.C., took her first trip last month since the pandemic started—staying in a cabin in Virginia’s Shenandoah Valley. Last week, she drove to Maryland to get her nails done and hair styled for the first time since mid-March.
“I was clean enough to go into a surgical procedure,” she said. “I had the face shield, and the mask.” The salon also took her temperature and made her sign a release, she said. She said she recently told herself that this pandemic could last for up to another 18 months, and she is slowly trying to figure out how much risk she is willing to take. She is about to renovate her home.
The U.S. economy’s trajectory will hinge on the ability and willingness of consumers like her to spend in coming months amid uncertainty about the virus.
There are other signs consumer spending is picking up. Car sales rose in May after falling in prior months. Mortgage applications to buy homes have risen to multiyear highs. Restaurant bookings are slowly picking back up, even though they remain far below prepandemic levels.
One factor is cheap money. The Federal Reserve has lowered its benchmark interest rate to near zero, and consequently, the cost of borrowing for things like homes, cars, furniture and other big-ticket items has dropped to historic lows.
Low interest rates allowed Boston Interiors, a retail furniture chain in Massachusetts, to extend its standard refinancing plan for customers to 36 months from 24 months during the pandemic. That has allowed customers to buy bigger purchases while keeping monthly payments low, said president Peter Theran.
Mr. Theran opened five of the company’s nine stores in early June. In the roughly three weeks since, business has been solid, with same-store sales running about even compared with a year ago. The morning they reopened, four or five customers were waiting outside, eager to get in.
“People have been in their house so long, their perceived flaws in their home are enormous to them now,” Mr. Theran said. “Things they were only mildly annoyed by are suddenly unbearable.”