WASHINGTON: US consumer spending increased more than expected in July, boosting expectations for a sharp rebound in economic growth in the third quarter, though momentum is likely to ebb as the Covid-19 pandemic lingers and money from the government runs out.
The report from the Commerce Department on Friday also showed a rise in personal income after two straight monthly declines, but a chunk of the increase was from unemployment benefits, which were bolstered by a weekly $600 supplement from the government that expired on July 31. Both consumer spending and income remain well below their pre-pandemic levels.
“The consumer is back spending at the shops and malls in July, but many of their purchases reflected pent-up demand following the pandemic lockdown,” said Chris Rupkey, chief economist at MUFG in New York. “The expenditures needed to fuel the economy’s recovery in August are a big question mark given the hit to personal income nationwide with the loss of those $600 weekly unemployment benefit checks.”
Consumer spending, which accounts for more than two-thirds of US economic activity, rose 1.9 per cent last month, after jumping 6.2pc in June. Economists polled by Reuters had forecast consumer spending would gain 1.5pc in July. July’s increase left consumer spending about 4.6pc below its February level.
Consumers boosted purchases of goods like new motor vehicles. They also lifted spending on healthcare, dining out and hotel and motel accommodation. While spending on goods has rebounded above its pre-pandemic level, outlays on services are about 9.7pc from recovery as consumers remain wary of exposure to the coronavirus.
That is a bad omen for the services-based economy, which fell into recession in February. Though new Covid-19 infections have subsided after a broad resurgence through the summer, many hot spots remain, especially at college campuses that have reopened for in-person learning.
The economy suffered its deepest contraction in at least 73 years in the second quarter, with consumer spending at the forefront of the decline in gross domestic product. While economists are anticipating a sharp rebound in GDP in the third quarter, led by consumer spending, they are cutting estimates for the fourth quarter.
Stocks on Wall Street were trading higher while the dollar was down against a basket of currencies. Prices of US Treasuries rose.
Americans in low-wage jobs have borne the brunt of the economic downturn. Though President Donald Trump extended the jobless benefit supplement, the payout was cut to $300 per week and funding for the programme is expected to be depleted by September.