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Consumer Spending Rose in August, but Incomes Pose Hurdle for U.S. Recovery


U.S. household income fell sharply in August while worker layoffs remained high, developments that could weigh on the economic recovery as it shows signs of slowing amid the coronavirus pandemic.

Personal income—a measure of what Americans received from salaries, investments, and government assistance programs—fell 2.7% in August from a month earlier, the Commerce Department said Thursday. The decline was due entirely to a drop in unemployment benefits, the data showed.

The drop offers a mixed outlook for the U.S. economy. By most measures it continues to recover from the pandemic-induced recession, but also appears to be losing some momentum.

Spending HabitsPersonal saving has dropped in recent monthsbut remains higher than previous years.Meanwhile spending on services has keptbelow pre-coronavirus pandemic levels.Personal spending and saving
.trillionSavingNondurable goodsServicesDurable goods2018’200246810$12

Initial jobless claims—a proxy for layoffs—fell by 36,000 to 837,000 in the week through Sept. 26, the Labor Department reported Thursday. Claims fell quickly earlier this summer but have plateaued over the last month and remain elevated well above pre-pandemic peaks.

Household income was still up nearly 2% in August compared with February, before the pandemic hit the U.S., boosted by one-time federal stimulus checks, stock-market gains, and weekly unemployment insurance payments, which remain higher than normal despite a drop in August.

Consumer spending has continued to grow. Households stepped up outlays on goods and services by 1% in August from a month earlier, the Commerce Department reported. But the gain was far smaller than earlier in the summer when spending grew 9% in May, 7% in June and 2% in July. While consumer spending on retail goods such as bicycles and cars have risen above pre-pandemic levels, spending on services—such as restaurant outings—remain below February levels.

“The main engine of economic activity is at risk of stalling as the economy rounds the final corner of 2020,” Gregory Daco, chief U.S. economist at Oxford Economics, said in a note to clients. Economist Paul Ashworth at Capital Economics in a separate note to clients said “the fading of the fiscal stimulus will slow the recovery rather than plunging the economy back into recession.”

The labor market’s recovery also is showing signs of slowing down since the summer. Employers through August have generated about 11 million jobs, or about half of the 22 million lost at the start of the pandemic, with the bulk of the gains coming in May through July.

Economists surveyed by The Wall Street Journal project September’s jobs report, to be released Friday, will show a gain of 800,000 jobs and an 8.2% unemployment rate, down slightly from 8.4% in the prior month.

The level of weekly jobless claims shows layoffs remain persistent in some industries, and more companies announced cuts this week. American Airlines Group Inc. and United Airlines Holdings Inc. told employees they will go forward with more than 32,000 job cuts Thursday, after lawmakers were unable to agree on a broad coronavirus-relief package. Insurer Allstate Corp. on Wednesday said it planned to lay off 3,800 employeesWalt Disney Co. on Wednesday announced permanent layoffs for 28,000 theme-park workers who were previously on temporary furlough.

U.S. household income and spending during the coronavirus crisisSource: Commerce DepartmentNote: Seasonally adjusted at an annual rate
.trillionSavingTaxesOther spendingServicesNondurable goodsDurable goodsFeb. 2020MarchAprilMayJuneJulyAug.051015$20

Still, economic readings suggest the economy rebounded quickly in the third quarter that ended Wednesday after contracting sharply in the second quarter. But the August drop in aggregate household income could slow consumer spending in the fourth quarter and exert a drag on the economic recovery.

Consumer spending is the key 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 that ended Wednesday. Economists estimate U.S. gross domestic product—the broadest measures of goods and services—grew at an annual rate of 30% or more in July through September.

That would restore a big chunk of output lost in the spring when the coronavirus outbreak prompted businesses to shut down. Output fell at a 31% pace in the second quarter after a 5% drop in the first, the Commerce Department said this week, the sharpest quarterly contraction in the post-World War II era.

The economy is still digging out of a big hole. Few economists expect the third quarter’s robust growth to persist, in large part because Americans’ ability and willingness to spend may not hold up. Forecasting firm IHS Markit projects growth in U.S. output to slow to a 2.5% annual rate in the fourth quarter.

Spending has been supported by strong job growth after pandemic-related closures ended and federal assistance to households.

The path ahead for the economy is uncertain. First, it isn’t known how much employers can expand or cut back on layoffs in the absence of a coronavirus vaccine. Second, the effects of federal aid to households are fading. Many households got up to $1,200 in one-time payments under the Cares Act, along with an enhanced weekly unemployment benefit that shrank 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 normal jobless benefits, under federal stimulus in the Cares Act. Under an executive action by President Trump, unemployed workers received an additional $300 a week for no more than six weeks starting in the week ended Aug. 1.

If consumers cut spending in response to the reduction in their income, businesses from restaurants to bike repair shops to doctors could take a hit on sales, denting economic growth.

Also, much of the spending in the summer may have reflected “pent-up demand”—purchases that households had put off in the spring. This includes visits to the dentist, home repairs and clothing purchases. Now that many households are caught up on those purchases, spending may revert to more-normal levels this winter.





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