Consumer Spending Surges But Income Falls, Dampening Hopes for Sharp Recovery

June 26, 2020 Updated: June 26, 2020

Consumer spending in America staged a record rebound in May though personal income fell, dampening hopes for a quick recovery from the pandemic-driven recession.

The Commerce Department released its monthly report on household income and spending on Friday, which showed that personal consumption expenditures (PCE) increased $994.5 billion (8.2 percent) in May. Consumer spending accounts for around two-thirds of demand in America’s economic output.

Spending took a nosedive in April as many businesses remained shuttered under state and city orders to prevent the spread of the Chinese Communist Party (CCP) virus, the novel coronavirus that emerged from China late last year and causes the disease COVID-19. Last month’s Commerce Department figures showed that personal consumption expenditures plummeted by a revised $1.76 trillion (12.6 percent) in April, the largest drop since the government started tracking the series in 1959.

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Shoppers are seen outside a retail store as the phase one reopening of New York City continues during the outbreak of COVID-19 in the Brooklyn borough of New York City, on June 9, 2020. (Shannon Stapleton/Reuters)

Many state economies reopened in May, and a surge in household income from the federal stimulus bill and unemployment insurance gave households money to spend. But there are serious questions around whether the gains in consumer spending are sustainable, with personal income dropping and analysts expecting it to decline further as millions lose their unemployment checks starting next month.

Friday’s Commerce Department figures showed that disposable personal income decreased by $911.1 billion (4.9 percent) in May.

“There’s a fight in the market between folks who believe that the economic resurgence is unstoppable and those who believe that there is more trouble ahead,” said Christopher Grisanti, chief equity strategist at MAI Capital Management in Cleveland, Ohio.

“It’s more probable that the scenario is not as rosy as the market thinks,” Grisanti added. While encouraging, the personal expenditure number came in 0.8 percent below market expectations, with economists polled by Reuters forecasting PCE to rise by 9.0 percent in May. MarketWatch analysts expected spending to surge by 10 percent.

While the U.S. economy turned the corner in May after the sharpest and quickest decline in its history, but further progress is likely to come much slower as millions of Americans are out of work and weak demand dampens expectations for a surge in re-hiring.

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People who lost their jobs wait in line to file for unemployment at an Arkansas Workforce Center in Fayetteville, Ark., on April 6, 2020. (Nick Oxford/Reuters)

Millions of Americans are out of work, businesses are struggling to get back to normal and the United States simply doesn’t need as many employees with the domestic and global economies mired in a deep slump.

The Labor Department’s weekly jobless claims report (pdf) released Thursday showed that another 1.48 million American workers filed initial jobless claims for the week ending June 20.  While that is far lower than the record 6.867 million in late March, initial jobless claims remain more than double their peak during the 2007-2009 Great Recession.

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