Spending Plunge will keep weighing on U.S. Growth

Even with spending in May and June likely to improve from April’s staggering decline, the second-quarter collapse will be massive.

By guest author Justin Lahart from Wall Street Journal

Graphic and captions courtesy by Wall Street Journal

With more businesses starting to reopen, consumer spending looks as if it is starting to dig its way out of the hole caused by the coronavirus crisis. But the hole is very deep.

The Commerce Department on Friday reported that consumer spending fell a record 13.6% in April from a month earlier following a 6.9 % drop in March. Adjusted for inflation, that places April’s level of spending about 17% below its first quarter average. Put into the annualized terms the Commerce Department uses when reporting gross domestic product—what would happen if the quarterly drop in spending lasted a year—that translates into a 53 % contraction.

Spending has picked up since April. Chase credit and debit card data analyzed by economists at JPMorgan Chase shows that spending has lately been down about 20 % versus a year ago, which compares with 40 % decline in late March. And it seems likely there will be some further improvement through the end of the quarter as states continue to ease restrictions on business.

Even so, the drop in spending in the second quarter is bound to be substantial. If, for example, spending in May and June was half as much below the first quarter average as spending in April was, that still would translate into an annualized decline of nearly 40 %.

Moreover, there are limits to how much spending can rebound. The boost from the stimulus checks most Americans received last month is probably already waning, for example. A recent analysis found, that people with less than USD 500 in their bank accounts spent nearly half of their stimulus payments within 10 days of receiving them.

Then there is the matter of the labour market. Economists expect that next week’s employment report will show that millions more people lost their jobs in May and that the unemployment rate will rise even more. That will make many people reluctant to spend, and that reluctance won’t go away until there are sure signs that the job market is improving, and unemployment has begun to fall. With the Labour Department on Thursday reporting that an additional 2.1 million people filed state unemployment claims last week, that is not close to happening.