Consumer spending slumps by most ever

Fall-off to impede economic recovery

Grace James (left) and her sister, Elizabeth, look through dresses Friday at Tulips clothing store on Kavanaugh Boulevard in Little Rock’s Heights neighborhood. An economist warned Friday that “more frugal consumer behavior … will dampen the recovery.”
(Arkansas Democrat-Gazette/Thomas Metthe)
Grace James (left) and her sister, Elizabeth, look through dresses Friday at Tulips clothing store on Kavanaugh Boulevard in Little Rock’s Heights neighborhood. An economist warned Friday that “more frugal consumer behavior … will dampen the recovery.” (Arkansas Democrat-Gazette/Thomas Metthe)

WASHINGTON -- U.S. consumer spending plunged by a record-shattering 13.6% in April as the viral pandemic shuttered businesses, forced millions of layoffs and sent the economy into a deep recession.

Last month's spending decline was far worse than the revised 6.9% drop in March, which itself had set a record for the steepest one-month fall in records dating to 1959. Friday's Commerce Department figures reinforced evidence that the economy is gripped by the worst downturn in decades, with consumers unable or too anxious to spend much.

Even with employers cutting millions of jobs, though, incomes soared 10.5% in April, reflecting billions of dollars in government payments in the form of unemployment aid and stimulus checks. Wages and salaries, normally the key component of overall income, sank by an annualized $740 billion in April. By contrast, income in the form of government support jumped by an annualized $3 trillion. That form of income, though, is likely to fade in coming months as some government aid programs expire.

The rise in income temporarily masks the fact that people are in a fragile economic position, said Michelle Meyer, head of U.S. economics at Bank of America Corp.

[CORONAVIRUS: Click here for our complete coverage » arkansasonline.com/coronavirus]

"Unemployment insurance only offsets less than half of the loss in compensation," Meyer said. "The reason the numbers look so extreme this month was because of the one-time checks that were sent out -- which won't be continuing."

Friday's report showed sharp declines in consumer spending across the board -- from durable goods like cars to nondurable items such as clothing to services ranging from doctor visits to haircuts. Spending tumbled 17.3% for durable goods, 16.2% for nondurables and 12.2% for services.

"The economics of fear and sudden stops were apparent in April as fearful and locked-down households cut back on spending," Gregory Daco, chief economist at Oxford Economics, said in a research note.

The depth of the spending drop is particularly damaging because consumer spending is the primary driver of the economy, accounting for about 70% of economic activity. Last month's figure signaled that the April-June quarter will be especially grim, with the economy thought to be shrinking at an annual rate near 40%. That would be, by far, the worst quarterly contraction on record.

With spending plunging and incomes surging on the strength of government support payments, Americans' personal savings rate hit a record high of 33% of after-tax income in April. Economists said this underscored how anxiety and uncertainty about the economy are making consumers reluctant to spend.

Daco suggested that "more frugal consumer behavior ... will dampen the recovery."

"This is particularly true as the social benefits will gradually erode over time, leaving households more financially constrained," he said.

Friday's report showed that an inflation gauge preferred by the Federal Reserve fell 0.5% after a 0.2% drop in March. Fed officials have cited the absence of inflation pressures as one reason they can be aggressive in supporting the economy by cutting their benchmark interest rate to near zero and pumping billions of dollars into credit markets to keep them flowing smoothly.

In April, the nation's unemployment rate was 14.7%, the highest since a record high of 24.9% in 1933 during the Great Depression. Many economists think it will top 20% for May. States are gradually restarting their economies by letting some businesses reopen with certain restrictions, and some laid-off employees are being recalled to work. Still, the job market remains severely depressed, and the outlook for the rest of the year is still bleak.

Some financial support for the tens of millions of consumers who have been laid off over the past two months is coming from the weekly unemployment benefits. Besides whatever unemployment aid states are providing to laid-off workers, the federal government is providing $600 a week in additional benefits.

A debate in Congress over whether to extend the federal unemployment boost looks sure to intensify, with the number of people receiving that aid now topping 30 million -- one in five workers. The money is set to expire July 31. Yet with the unemployment rate widely expected to remain in the mid-teens by then, lawmakers will face pressure to compromise on some form of renewed benefits.

The Trump administration asserts that the economy will begin to regain its health in the second half of the year, with businesses increasingly reopening and restoring jobs and consumers increasing spending. Most economists say, though, that the lingering effects of the job losses and likely business bankruptcies will take longer to overcome, especially if a second wave of the coronavirus occurs.

Analysts generally believe the economy won't manage to sustain a solid recovery until a vaccine is widely available. And until Americans resume spending at something close to their previous levels, jobs aren't likely to return in a significant way.

Data from Chase Bank credit and debit cards shows that consumers have slowly increased their spending since the government distributed the $1,200 stimulus checks in mid-April. But most of that increase has occurred in online shopping. Spending in stores is still down 35% from a year ago, according to Chase, after having plummeted 50% at its lowest point.

Another report Friday showed consumer sentiment stumbled in late May as pessimism built about the economic outlook. The University of Michigan's final sentiment index fell to 72.3 from a preliminary reading of 73.7.

The pandemic halted purchases of all but the most essential goods and services amid the lockdowns, but gradual reopenings nationwide will spur spending in the coming months. Even though the temporary income replacement will help Americans to start spending again, economists expect it will take a year or more before it recovers to pre-virus levels.

Information for this article was contributed by Martin Crutsinger of The Associated Press and Reade Pickert of Bloomberg News.

photo

A woman enters a Gordmans store Thursday in St. Charles, Mo. Stage Stores, which owns Gordmans, is shutting down all of its stores and has filed for Chapter 11 bankruptcy. (AP/Jeff Roberson)

A Section on 05/30/2020

Upcoming Events