US spending drops; consumer savings soar

Spending drops at the same time that personal income jumps 10.5 percent; savings rate hits 33 percent.

Consumer Spending
[File: Bloomberg] [Unspecified]

People in the United States spent far less this April than they did during the same period in 2019. And in a sign that many are bracing for more economic hardship, personal savings reached an all-time high, according to economic data released by the US Department of Commerce on Friday.

Further darkening an already grim outlook, US monthly exports collapsed. Now many economist are predicting the most significant contraction in gross domestic product in the second quarter since the Great Depression of the 1930s.

Consumer spending is a significant indicator because it accounts for more than two-thirds of US economic activity. According to the Department of Commerce, people in the US spent 13.6 percent less last month, the biggest drop since the government started tracking this information in 1959. April’s drop eclipsed the previous all-time decrease of 6.9 percent in March.

Spending was depressed by a decrease in outlays on healthcare as dental offices closed, and as hospitals postponed elective surgeries and non-emergency visits to focus on patients suffering from COVID-19.

COVID-19 has killed over 100,000 people in the US, the highest death toll in the world.

In response to widespread lockdowns, people spent more time cooking and eating at home. Spending declined at restaurants, which have shifted to delivery and pick-up service only. Overall spending on food and beverages fell in April.

Consumer Spending

April incomes rose because of the US government’s historic $3 trillion fiscal package. Millions of people in the US received one-time $1,200 cheques. That – combined with increased unemployment benefits for the roughly 31 million people who were unemployed – helped raise incomes.

Personal income surged a record 10.5 percent last month after falling 2.2 percent in March. Savings soared to a historic $4 trillion, with the savings rate hitting a record 33 percent. But business closures weighed on wages, which dropped 8.0 percent in April after falling 3.5 percent in March.

“The saving rate represents both opportunity, and a warning,” Chris Low, chief economist at FHN Financial in New York, told Reuters News Agency. “If the economy reopens quickly without consequence, these savings represent considerable spending power in the second half. If it takes longer to reopen the economy, these savings will be used for sustenance over the next few months.”

The economy is gradually reopening after non-essential businesses were shuttered in mid-March to slow the spread of COVID-19, raising hopes that the economic slump was nearing a bottom.

Exports drop

In a second report on Friday, the Department of Commerce said goods exports tumbled 25.2 percent to $95.4bn in April, a 10-year low. The broad decline in exports was led by a 65.9 percent collapse in shipments of motor vehicles and parts. That outpaced a 14.3 percent tumble in imports. As a result, the goods trade deficit widened 7.2 percent to 69.7 billion last month.

The wider goods trade deficit is likely a drag on the second-quarter gross domestic product, which economists expect could drop at as much as a 40 percent rate, a pace not seen since the 1930s.

Source: Al Jazeera, News Agencies