Consumers stepped up spending for the second straight month in June but fresher evidence shows households recently pulled back as coronavirus infections rose, suggesting the U.S. economy is destined for a choppy ride ahead.
Evidence is building that the recovery will be halting and slow rather than the V-shaped rebound that some economists had earlier projected. A day after reporting the sharpest quarterly economic contraction on record, the government said Friday households boosted spending a healthy 5.6% in June. The increase—reflecting higher purchases of products and services such as medical care, restaurant meals, travel and clothing—followed an 8.5% increase in May after household spending crashed earlier in the spring.
The ability and willingness of Americans to return to the marketplace will be the key ingredient of any recovery, and economists still expect a third-quarter economic bounce back. Whether it will be sustained is unclear. Credit-card spending data, for instance, shows households have moderated spending in recent weeks as the country faces a surge in infections. A University of Michigan report Friday showed consumer confidence fell in July.
The expiration this week of a $600 weekly unemployment benefit amid congressional gridlock could further slow the recovery. Federal and state unemployment benefits have propped up household income during the pandemic, with payouts totaling $1.4 trillion in June, up from pre-pandemic levels of around $28 billion, a Commerce Department report said.
“The more Covid cases there are, the more fear there is from consumers and that impacts their spending in a negative way,” said Lara Koslow, managing director and senior partner at Boston Consulting Group. The company conducted surveys in July showing new peaks in the number of consumers who say they are concerned about going outside their homes for fear of catching the virus. Such consumers are less likely to spend, Ms. Koslow said.
Steve de Man shows one of the challenges facing the world’s largest economy right now. He is 38 years old, healthy, employed and has money to spend. But he lives in Texas, one of several big states, along with Florida and California, where infections have risen. The financial-services professional has spent months holed up in his Austin apartment out of fear of catching the virus. Only last week did he visit a Starbucks for the first time since the pandemic. He recently went out for his first restaurant meal, eating outside.
When he compared his credit-card statement from last year, he saw he spent significantly less. He has put savings in investment accounts and fueled his obsession with artifacts. This week he received his latest purchase from eBay: an autograph from Sandra Day O’Connor, the retired Supreme Court justice.
“I’ve been venturing out—still to be cautious, safe—but doing things that in March and April and May were kind of unthinkable,” he said. “I’m starting to think about vacation again.” He may visit Wyoming this fall.
Many Americans are, like Mr. de Man, saving a chunk of the money they have received from wages, stimulus checks, unemployment money or investment returns. The personal savings rate stood at 19% in June, more than double what it was in February.
Saving is good for households and the economy in the long run—but it saps the economy of activity that could stimulate a quicker rebound in the short run. Consumer spending represents more than two-thirds of economic demand in the U.S. A sharp drop in spending earlier this spring is the biggest reason that gross domestic product fell 9.5% in the second quarter from the prior quarter—or 32.9% when calculated at a yearly rate. Earlier in the pandemic, millions of businesses across the U.S. shut down and unemployment shot up to historic levels.
One encouraging sign: Household income has risen during the pandemic despite double-digit unemployment, mainly due to government aid programs. Friday’s Commerce Department report showed that while aggregate income in the U.S. fell 1% in June from the prior month, it remained up 4% from February, the month before the pandemic shut down swaths of the economy.
Economists are predicting a rebound in the third quarter. Pantheon Macroeconomics projects output could rise at an annual rate of 25%. Morgan Stanley projects nearly 22% growth. But the outlook is cloudy after that.
Data suggest economic activity picked up at the end of the second quarter as states eased business restrictions.
There are broad signs consumers again pulled back in July. Credit- and debit-card transactions were flat in July after rising in May and June, according to a JPMorgan Chase & Co. tracker. Spending at restaurants also stalled, according to data by Facteus.
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Households could also become further strained if unemployment rises again. Weekly initial jobless claims—a proxy for layoffs—had steadily fallen from April through early July but have risen the past two weeks, the Labor Department said Thursday. The Census Bureau said in its latest weekly Household Pulse Survey that slightly over half of households lost employment income in the week ended July 21, up from a month earlier.
That will depend on many factors. Among them: whether Congress approves additional federal spending, and whether Americans feel comfortable enough to venture out into the marketplace.
Congressional leaders are debating whether and how to extend the enhanced unemployment benefit as part of a broader coronavirus-relief bill. Economists say the expiration of the benefit could reduce spending and slow the economic recovery.
Even with the federal aid, many are barely hanging on. Brigette Aranda, 35, of Naples, Fla., said she has been doing everything she can to reduce her family’s expenditures, including driving less, trying not to use the air conditioner and unplugging objects around the house.
On a recent day, the single mother of five said she had $3 in the bank. She said she has spent $2,500 in savings and was unable, as planned, to buy her son a car to celebrate his graduating from high school and getting a full scholarship to college.
“I’m literally about to be without money,” Ms. Aranda said. “I’m praying.” Without the $600 federal benefit, she said her unemployment benefits are $247 a week.
Until recently, Ms. Aranda worked at a restaurant as a server and bartender, earning around $900 in a good week, as well as $320 a week for part-time secretarial work at a local school that has since dried up.
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