US consumer spending rose in August, but currency challenge for economic recovery

US consumer spending rose 1.0% in August, while income declined, presenting a new obstacle to economic recovery.

The Commerce Department said personal income fell 2.7% in August from a month earlier. Declining government aid for unemployed workers led to a decrease in income.

Consumer spending is the major driver of growth in the world’s largest economy, providing two-thirds of economic demand. Strong consumer spending helped propel the economy in the third quarter ended Wednesday. Economists estimate that US GDP — a broad measure of goods and services — grew at a rate of 30% or more annually in July through September.

When an outbreak of coronavirus prompted businesses to close, a large portion of production lost in the spring would be restored. After a 5% drop in the first week, output fell at a 31% pace in the second quarter, with the Commerce Department saying that this week is the fastest quarter contract since World War II.

The economy is still digging out of a big hole. Some economists expect strong third quarter growth to continue, in large part because Americans’ spending capacity and willpower may not be on hold. The forecasting firm IHS Market has slowed US production growth to a 2.5% annual rate in the fourth quarter.

Other major economic readings point to a slow recovery. Unemployed claims remain high compared to pre-epidemic levels. Economists released on Friday showed 800,000 jobs and an 8.2% unemployment rate, down slightly from 8.4% in the prior month, according to The Wall Street Journal project’s September jobs report.

Employers have created about 11 million jobs through August, or about half of the 22 million lost at the start of the epidemic.

The spending so far has been supported by strong job growth following epidemic-related closures and federal aid to households.

The way forward for the economy is uncertain. First, it is not known how much expansion or retrenchment employers can take in the absence of a coronovirus vaccine. Second, the effects of federal aid in households disappear. Many families received up to $ 1,200 in lump sum payments under the CARS Act, along with a weekly increased unemployment benefit that shrunk in August and is set to expire this month.

From late March through July, unemployed Americans received $ 600 a week – or $ 2,400 a month – on top of their usual unemployed benefits, under federal stimulus in the CARS Act. Under an executive action by President Trump, unemployed workers received an additional $ 300 a week for no more than six weeks ending in the week.

If consumers cut spending in response to a decrease in their income, businesses ranging from restaurants to bike repair shops to doctors can dent economic growth.

In addition, a lot of summer expenses may have reflected the “pent-up demand” —the men closed homes in the spring. This includes visits to the dentist, home repairs and clothing shopping. Now that many homes are caught on those purchases, expenses can return to more-common levels this winter.

Hannah Purdy, 28, of Bona, Idaho, and her husband cut spending in the spring for fear of losing their job at a hospital where she is a revenue-cycle analyst and is a mechanical engineer. When this did not happen, they started increasing their spending this summer. He remodeled his basement and, last month, installed hardwood floors.

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Now, he says, his spending habits have become normal.

“We’re both feeling a little better about the economy,” she said. “I don’t necessarily feel better about the epidemic, but I feel better about our ability to figure out how to work effectively within the realm of an epidemic.”

Their disposable income has actually increased this year. After the Federal Reserve cut interest rates, the couple refinanced their mortgages at a lower rate, saving them $ 300 per month. On top of this, they say, real estate websites indicate that their home has increased in value, so they are feeling richer.

This fall, she plans to take her first trip to March – to visit her parents in Tennessee. She said that overall, however, they remain cautious and are earning a greater share of their income than spending it.

A positive sign: Families have gained confidence in recovery. The conference board, a private research group, said the consumer confidence index rose in September this week to its highest level since March. High confidence makes it more likely that consumers will spend rather than save – and boost the overall economy.

Economists have long used letters of the alphabet such as V and U to describe economic reforms. But the coronovirus recession is so different from the previous recession that economists are coming up with new shapes to describe a possible recovery. The WSJ explains. Illustration: Jacob Reynolds

Write Josh Mitchell at [email protected]

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