WASHINGTON: US consumer spending rebounded by the most on record in May, but the gains are not likely to be sustainable, with income dropping and expected to decline further as millions lose their unemployment cheques starting next month.
The surge in spending reported by the Commerce Department yesterday is also under threat from a jump in coronavirus cases in many parts of the country, including densely populated California, Texas and Florida.
The rising Covid-19 infections chipped at consumer sentiment in the second half of June. Confidence in government economic policies dropped in June to the lowest level since President Donald Trump entered the White House.
The economy has been showing signs of turning around after tough measures to slow the spread of the respiratory illness pushed it into recession in February. Hiring, homebuilding permits, industrial output and orders for manufactured goods rebounded in May, recouping some of their historic losses.
“There are still huge pitfalls ahead for the economy,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania.
The Commerce Department said consumer spending, which accounts for more than two-thirds of US economic activity, jumped 8.2 per cent last month. That was largest increase since the government started tracking the series in 1959. Consumer spending tumbled by a historic 12.6pc in April.
Economists polled by Reuters had forecast spending rising 9.0pc in May. Spending was boosted by the reopening of many businesses after being shuttered in mid-March.
Consumers stepped up purchases of motor vehicles and recreational goods. They also boosted spending on healthcare, and at restaurants, hotels and motels.
But personal income dropped 4.2pc, the most since January 2013, after surging by a record 10.8pc in April when the government handed out one-time $1,200 cheques to millions of people and boosted unemployment benefits to cushion against the Covid-19 hardship. The payments are part of a historic fiscal package worth nearly $3 trillion.
In a separate survey yesterday, the University of Michigan said its consumer sentiment index dipped to a reading of 78.1 from 78.9 in the middle of June. Though sentiment rose from May, consumers in the regions with record rises in coronavirus cases were less upbeat relative to Northeast residents, which could weigh on the overall mood in the months ahead.
Stocks on Wall Street fell, pressured by the rising virus infections and the Federal Reserve’s move to cap big bank dividend payments and bar share repurchases until at least the fourth quarter.
Income in May was weighed down by a decrease in government welfare payments. The government will stop paying an additional $600 per week in unemployment benefits on July 31. Economists estimate about 26m people, two-thirds of whom do not qualify for the regular 26-week state unemployment insurance benefits, would be left without income.
About 30.6m people, roughly a fifth of the labour force, were collecting unemployment cheques in the first week of June. Government transfers to households rose at an annualised $1.1trn rate compared to $3trn in April.
Wages rebounded 2.7pc after dropping 7.6pc in April.