Consumer Spending Rebounded Last Month — but Threats to the Economy Remain

Americans increased their spending at a record pace last month — but fading relief funds, high unemployment levels and a spike in new coronavirus cases threaten to weaken the economy.

According to the Commerce Department, consumer spending in the United States rose 8.2% in May, compared with the previous two months’ plunges, as federal authorities eased restrictions on businesses amid the coronavirus pandemic. (In March, that figure sank 6.6%, while spending in April plummeted 12.6%.)

The rebound also comes as personal income slid 4.2%, versus a 10.8% improvement the prior month due to a massive economic stimulus package. However, millions of Americans are expected to lose their unemployment checks starting next month, which could push consumer spending back down.

For several weeks starting mid-March, large swaths of the country went into lockdown to help prevent the spread of the COVID-19 outbreak. Government-mandated stay-at-home orders forced scores of offices, stores and public spaces to shut down through April and some of May, and employers resorted to furloughs and layoffs that left a staggering 47 million people unemployed over the course of a 14-week period.

Although many businesses have reopened and workers are returning to their posts, consumers are still holding onto cash on fears of another financial crisis. Economic activity is still well below levels prior to the pandemic: Just yesterday, the Commerce Department reported that the gross domestic product, which measures the output of U.S. goods and services, contracted at a seasonally adjusted annual rate of 5% in the first three months of the year. It marked the economy’s sharpest quarterly plunge since the 8.4% fall in the fourth quarter of 2008 at the height of the Great Recession.

As of today, more than 2.42 million people in the U.S. have been sickened by COVID-19, which has led to at least 124,500 deaths. Some states that partially reopened sooner than others — including Texas, Florida and Arizona — are currently seeing a surge in confirmed coronavirus cases, leaving officials and businesses to consider scaling back on their reopening plans.

Federal Reserve officials and private-sector economists are expecting a much worse decline in the next quarter, which counts the months of April — majority of which the entire country spent on lockdown — through June. Some forecasts put the GDP drop at a nearly 30% annual rate. In last week’s testimony to Congress, central bank chairman Jerome Powell said that lawmakers should consider extending jobless benefits beyond the usual six-month period, assuming that claims will remain high through the end of the year.

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