U.S. consumer spending rebounds, falling income a threat

MACROECONOMICS - WASHINGTON. U.S. consumer spending rebounded by the most on record in May, but the gains are not likely to be sustainable, with income dropping and expected to decline further as millions lose their unemployment checks starting next month.

The report from the Commerce Department on Friday added to increases in homebuilding permits, industrial production and orders for manufactured goods in suggesting the economy was turning the corner after the stringent measures to control the COVID-19 pandemic tipped it into recession in February.

But the nascent recovery is under threat from a surge in confirmed coronavirus cases in many parts of the country, including highly populated California, Texas and Florida.

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"There are still huge pitfalls ahead for the economy," said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. "Personal income and consumer spending are likely to take huge hits over the next couple of months unless Congress provides more fiscal stimulus."

The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 8.2% last month. That was largest increase since the government started tracking the series in 1959. Consumer spending tumbled by a historic 12.6% in April.

Economists polled by Reuters had forecast spending rising 9.0% in May. The surge in spending last month reflected the reopening of many businesses after being shut in mid-March to slow the spread of respiratory illness.

Consumers stepped up purchases of motor vehicles and recreational goods. They also boosted spending on healthcare, and at restaurants, hotels and motels.

But personal income dropped 4.2%, the most since January 2013, after surging by a record 10.8% in April when the government handed out one-time $1,200 checks to millions of people and boosted unemployment benefits to cushion against the COVID-19 hardship. The payments are part of a historic fiscal package worth nearly $3 trillion.

Stocks on Wall Street were trading lower, pressured by the rising coronavirus infections and the Federal Reserve's move to cap big bank dividend payments and bar share repurchases until at least the fourth quarter. The dollar was steady against a basket of currencies. U.S. Treasury prices rose.

Inflation weak

The drop in income last month reflected a decrease in government welfare payments related to the pandemic.