Consumer spending jumps record 8.2% in May

Consumer spending leaped a record 8.2% in May to mark the first increase since the coronavirus drubbed the economy, but fading government stimulus, still-high unemployment and a fresh viral outbreak are likely to muzzle similarly large gains in the months ahead.

The increase in spending fell short of the 10% forecast of economists polled by MarketWatch.

The reopening of the economy in May released a barrage of pentup demand as Americans were able to get out and about for the first time in several months.

What also allowed them to spend more were generous unemployment benefits, a federal loan program to encourage small businesses to keep paying workers and onetime stimulus checks for most families.

Spending is unlikely to continue to increase rapidly as the summer wears on, though.
For one thing, incomes remained depressed with tens of millions of people still out of work. They sank 4.2% last month, reflecting mass unemployment and receding federal aid after a big flush of financial relief in April.

Another wave of coronavirus cases, what’s more, is causing states to hit the pause button on reopening and deterring people from leaving their homes.

What Happened: Americans spent more on a variety of goods and services such as new cars, clothes, recreation and even eating out. Spending on health care also increased.

The increase in outlays was fueled by massive government relief. Unemployment-compensation payouts, for example, nearly tripled as tens of millions of people lost their jobs. More employees returning to work after a brief hiatus also led to a small increase in wages and salaries.

The savings rate, after soaring early in the pandemic as Americans hoarded their cash, fell to 23.2% from 32.2%. Before the pandemic savings averaged around 7% a month.

Inflation as expected barely rose in May, up just 0.1%.

The rate of inflation as measured by the PCE price index slipped to 0.5% in the past 12 months from 0.6% in the prior month — well below the Federal Reserve’s 2% target. The rate of inflation has fallen sharply during the pandemic.

Another measure of inflation that strips out food and energy, known as the core rate, also rose 0.1% last month. It’s up only 1% in the past year, unchanged from the prior month.

The devastation caused by the coronavirus has forced many companies to cut prices to try to drum up sales, especially in industries such as travel that have been the hardest hit. Analysts predict inflation will remain low until the economy recovers despite all the trillions of dollars spent by the government to prop it up.

Big picture: The economy turned the corner in May after the sharpest and fastest downturn in U.S. history, but further progress in recovering from the pandemic is likely to come much slower.

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

Economists say the government will likely have to provide more money to families and businesses to maintain the recent momentum. If federal aid dries up, the economy could suffer another setback.