Consumer Spending Rises as Incomes Fall, Giving Mixed Picture of Economic Recovery

By Tom Ozimek
Tom Ozimek
Tom Ozimek
Tom Ozimek is a senior reporter for The Epoch Times. He has a broad background in journalism, deposit insurance, marketing and communications, and adult education.
July 31, 2020Updated: July 31, 2020

American consumers increased their spending by 5.6 percent in June while personal income fell by 1.1 percent, giving a mixed picture of a U.S. economy struggling to sustain recovery momentum amid a surge of reported COVID-19 cases and lackluster jobs data.

Consumer spending is a major driver of the U.S. economy, accounting for around 70 percent of Gross Domestic Product (GDP), so the solid personal consumption expenditure number, released Friday by the Commerce Department, is an encouraging sign.

“The snapback in spending provides a good starting point for the third quarter,” said senior economist Sal Guatieri of BMO Capital Markets, in remarks to Market Watch. Yet “high-frequency indicators suggest consumption slowed in July due to the partial rollback of reopenings in several states.”

Yet a COVID-19 resurge in parts of the country and Thursday’s discouraging unemployment numbers, which saw another 1.43 million Americans file for unemployment last week, cast 2doubt on the vigor of the economic recovery. By comparison, the pre-pandemic peak in new weekly jobless claims in America was 695,000 back in 1982. In total, there are some 30 million Americans on unemployment.

Federal Reserve Chairman Jerome Powell on Wednesday flagged his concern the rebound may be weakening.

“All we can say today is that there is evidence in high-frequency data and surveys…It looks like we are seeing a slowdown,” Powell said in a press conference. “It might be short-lived, it might not. The timing seems related to the spike in cases” that began in June, he added.

Friday’s solid spending data also contrasts with predictably dismal second-quarter GDP figures, released Thursday, which showed the U.S. economy suffered its steepest contraction since the Great Depression, shrinking by an astonishing 32.9 percent in annualized terms.

“We all know that shutting down the economy was going to lead to a very, very sharp contraction in GDP. But there’s also evidence of a sharp rebound as well,” said Steven Ricchiuto, chief economist at Mizuho Securities USA.

Bright spots include continuing growth in both retail sales and consumer spending, while in May around 7.5 million jobs were created as lockdowns ended and businesses reopened.

A customer walks out of a U.S. Post Office branch and under a banner advertising a job opening, in Seattle, on June 4, 2020. (Elaine Thompson/File/AP Photo/)

Yet in a sign that the surge in consumer spending may be short-lived, Friday’s Commerce Department report also showed a 1.1 percent drop in personal incomes, which followed an even bigger 4.4 percent fall in incomes in May. Those sharp declines followed a 12.1 percent surge in incomes in April as a flood of government aid began to be distributed, including $600 per week in federal unemployment benefits, set to expire Friday while lawmakers haggle over the terms of an extension.

A Reuters poll of over 500 economists indicates the world economic outlook has dimmed, with rising CCP virus cases and the risk of renewed lockdowns increasing the chances that the economic rebound could slow significantly or even reverse course.

“We expect the economic reality of the virus to start catching up with businesses across the globe soon,” said Jan Lambregts, global head financial markets research at Rabobank.

“What we need is a vaccine or significant breakthroughs in medicines to decisively reopen our economies and restore business and consumer confidence—but there is no magic wand for the time being,” Lambregts added.

Most economists and long-term investors, along with the Fed, have said the economic outlook depends largely on the course of the virus.

Reuters and The Associated Press contributed to this report.