Economic Report: Consumer spending jumps record 8.2% in May as economy reopens, unemployment benefits surge

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The numbers: Consumer spending leaped a record 8.2% in May to mark the first increase since the coronavirus drubbed the economy, but fading government stimulus, still-high unemployment and a fresh viral outbreak are likely to muzzle similarly large gains in the months ahead.

The increase in spending fell short of the 10% forecast of economists polled by MarketWatch.

The reopening of the economy in May released a barrage of pentup demand as Americans were able to get out and about for the first time in several months.

What also allowed them to spend more were generous unemployment benefits, a federal loan program to encourage small businesses to keep paying workers and onetime stimulus checks for most families.

Spending is unlikely to increase rapidly as the summer wears on, though. For one thing, incomes remained depressed with tens of millions of people still out of work. They sank 4.2% last month, reflecting mass unemployment and receding federal aid after a big flush in April.

Another wave of coronavirus cases, what’s more, is causing states to hit the pause button on reopening and deterring people from leaving their homes.

What Happened: Americans spent more on a variety of goods and services such as new cars, clothes, recreation and even eating out. Spending on health care also increased.

The increase in outlays was fueled by massive government relief. Unemployment compensation, for example, nearly tripled.

The savings rate, after soaring early in the pandemic as Americans hoarded their cas, fell to 23.2% in May from 32.2%. Before the pandemic savings averaged around 7%.

Inflation as expected barely rose in May, up 0.1%. The rate of inflation as measured by the PCE price index slipped to 0.5% in the past 12 months from 0.6% in the prior month — well below the Federal Reserve’s 2% target.

Another measure of inflation that strips out food and energy, known as the core rate, also rose 0.1% last month. It’s up only 1% in the past year, unchanged from the prior month.

The devastation caused by the pandemic has forced many companies to cut prices to try to drum up sales, especially in industries such as travel that have been the hardest hit. Analysts predict inflation will remain low until the economy recovers despite all the trillions of dollars spent by the government to prop up the economy.

See: MarketWatch Economic Calendar

Read:Slow decline in jobless claims signals choppy recovery

Big picture: The economy turned the corner in May after the sharpest and fastest downturn in U.S. history, but further progress in recovering from the pandemic is likely to come much slower.

Millions of Americans remain out of work, businesses are struggling to back to normal and the U.S. simply doesn’t need as many employees with the domestic and global economies mired in a deep slump.

Economists say the government will likely have to provide more money to families and businesses to maintain the recent momentum. If federal aid dries up, the economy could suffer another setback.

Read:U.S. durable-goods orders rebound 15.8%, but manufacturers face long struggle

Market reaction: The Dow Jones Industrial Average DJIA, +1.17% and S&P 500 SPX, +1.09% were set to open lower in Friday trades.

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