Consumer Spending Rises in July, Fueling Hopes for Sharp Economic Recovery

August 28, 2020 Updated: August 28, 2020

American consumers spent more than expected in July, reinforcing expectations for a sharp rebound in economic growth in the third quarter, as consumer spending accounts for around 70 percent of U.S. gross domestic product.

Consumer spending grew by 1.9 percent, according to a report from the Commerce Department released Friday, beating expectations of economists polled by Reuters, who forecast a more modest rise of 1.5 percent. The better-than-expected number is a welcome indicator in a collection of choppy data, with shows a surging housing market and a rebound in business activity set against ongoing labor market troubles, with some 27 million unemployed and new weekly jobless claim filings stuck at around 1 million.

Personal income grew by 0.4 percent in July after falling for two straight months, the Commerce Department figures showed, another encouraging sign that fuels expectations for a sharp rebound in economic growth in the third quarter, despite some concerns that as fiscal stimulus dries up and the Chinese Communist Party (CCP) virus lingers, recovery momentum may drop.

White House economic adviser Larry Kudlow, speaking at this week’s Republican National Convention, talked up the possibility of a sharp, V-shaped recovery.

“There’s a housing boom. There’s an auto boom. A manufacturing boom. A consumer spending boom,” Kudlow said, listing areas of activity that are seeing a rebound and reiterating his conviction that America’s economy can avoid a double-dip recession.

“A V-shaped recovery is pointing to better than 20 percent growth in the second half of this year,” Kudlow said of his expectations for the annualized GDP growth rate, adding that the Trump administration plans to implement more tax cuts to stimulate investment and create jobs.

Yet with talks stalled on another relief bill and the labor market recovery losing steam, concern persists among economists that the much-hyped V-shaped recovery may flatten or even give way to another recessionary dip.

“We are clearly in the second phase of the recovery, driven by underlying fundamentals rather than purely the surge in activity as household reengaged,” said James Knightley, chief international economist at ING in New York. “This reinforces our view that a V-shaped recovery will not happen, and the U.S. economy is unlikely to recover all of its lost output until mid-2022.”

In a bid to support the labor market after the $600-a-week pandemic jobless benefit expired at the end of July, President Donald Trump signed an executive order earlier this month offering $300 a week in federally funded enhanced unemployment benefits, and called on states to provide an additional $100 a week. While more and more states are applying for the Lost Wages Assistance program to disburse the $300 in extra benefits, so far only five have said they plan to kick in the additional $100.

While the Commerce Department report showed that spending on goods has rebounded above pre-pandemic levels, outlays on services are below February levels as consumers remain wary of exposure to the virus. That is a bad sign for the services-based economy, which slipped into recession in February.

America’s record-long economic expansion that saw unemployment fall to 3.5 percent was cut short by the pandemic. Lockdowns and business shutdowns decimated the labor market, with 20.5 million jobs lost and the unemployment rate surging to 14.7 percent in April, both post-World War II records.

While economists expect a sharp rebound in GDP in the third quarter, led by consumer spending, many are cutting their forecasts for the fourth quarter amid lingering virus uncertainty.

Follow Tom on Twitter: @OZImekTOM