‘Don’t be fooled’ by the rebound in US consumer spending

Given the extraordinary upheavals in the United States economy this year, “record” moves in economic data don’t seem to pack the same punch as they once did.

So when we learned on Friday that consumer spending – the engine of the US economy accounting for some two-thirds of growth – staged a record rebound in May, the gain was greeted with a boulder-sized grain of salt.

Yes, the Commerce Department reported on Friday that consumer spending rocketed 8.2 percent last month – the biggest increase since 1959 when the department started tracking such things. Yes – it’s a great sign that the US economic engine is revving up after having plummeted a record (there’s that word again) 12.6 percent in April.

But while the surge in spending reflected a release of pent up demand as cities and states rolled back lockdown restrictions, it was funded in part by savings that had been bolstered by one-off government stimulus checks and a $600 federal weekly top up to unemployment benefits that’s set to expire at the end of July.

“Don’t be fooled,” warned Lydia Boussour, senior US economist at Oxford Economics, “the rebound was only partial and largely supported by April’s massive fiscal stimulus injection – consumers are still fearful.”

Indeed, the fading stimulus is reflected in household incomes and savings rates figures released by the Bureau of Economic Analysis on Friday.

Personal incomes fell 4.2 percent in May – the most since January 2013 – after rising a record 10.8 percent in April thanks to government virus-relief packages. The savings rate fell to 23.2 percent in May from a record 32.2 percent in April.

Economist Josh Bivens at the progressive-leaning think-tank Economic Policy Institute seized upon today’s data to argue for an extension of the federal top-up to unemployment benefits. “The economy’s growth will continue to be tightly constrained by insufficient demand for goods and services, and cutting off a policy support that helps households maintain spending is a terrible idea,” Bivens wrote in a blog post.

“We estimate that extending the $600 UI [unemployment insurance] benefits through the middle of 2021 would provide an average quarterly boost to gross domestic product (GDP) of 3.7% and employment of 5.1 million workers,” he added.

Beyond fading stimulus and questions over whether Congress will pony up more of it, there’s also the spectre of the economic recovery losing momentum as COVID-19 infections spike in parts of the country. On Friday, the governor of Texas announced he would roll back some of the states reopening plans following a jump in infections in the southern US state.