WASHINGTON: American consumers increased their spending by a sharp 8.2 per cent in May, partly erasing record plunges the previous two months, against the backdrop of an economy that's likely shrinking by its steepest pace on record this quarter.
Last month's rebound in consumer spending followed spending drops of 6.6 per cent in March and 12.6 per cent in April, when the viral pandemic shuttered businesses, forced millions of layoffs and sent the economy into a recession.
Since then, many businesses have reopened, drawing consumers back into shops and restaurants and restoring some lost jobs. Friday's Commerce Department report showed that Americans stepped up their spending in May despite a 4.2 per cent decline in personal income, which had soared by 10.8 per cent the previous month.
Income had jumped in April on the strength of billions of dollars in support through government payments in the form of unemployment aid as well as one-time USD 1,200 stimulus checks. In May, those stimulus checks were no longer counted as income for most people.
Besides whatever unemployment aid states are providing to the 30 million jobless Americans, the federal government is providing USD 600 a week in additional benefits. The federal money has pumped nearly USD 20 billion a week into the economy and enabled many of the unemployed to stay afloat.
But the USD 600 a week in aid will expire after July, and Trump administration officials have said they oppose an extension. Without the stimulus checks or an extension of unemployment aid, it's unclear whether consumers will keep spending freely.
In testimony to Congress last week, Federal Reserve Jerome Powell said he thought Congress should consider providing some form of extended unemployment benefits beyond their typical six-month period, on the assumption that joblessness will likely still be quite high by year's end.
Last month's rise in consumer spending also coincides with a sudden surge in coronavirus cases that's forcing states and businesses to consider scaling back or even reversing the re-openings. If an escalation of the pandemic does force another round of widespread business shutdowns, fewer people would shop, travel, eat out or attend large events.
That would reverse any rebound in spending and would further weaken the economy.