WSJ: U.S. Consumer Spending Rebounded in May, but Virus Surge Poses Economic Threat

WSJ: U.S. Consumer Spending Rebounded in May, but Virus Surge Poses Economic Threat

Personal consumption increased at record 8.2% pace from the month before, signaling a partial recovery
By: Josh Mitchell

Americans cautiously returned to the marketplace last month, helping the economy slowly dig out from a severe recession. But a new rise in coronavirus infections threatens the nascent recovery.

Household spending on goods and services rose a record 8.2% in May, the government said Friday. That was more than double the prior all-time high on records dating from 1959. Americans spent big on long-lasting items like cars, refrigerators and sofas.

The report boosted hopes that a good portion of consumers are eager and able to spend despite historically high unemployment. But it also showed just how far the economy has to go to recover from what economists have already labeled a deep recession caused by the pandemic. Consumer spending remained down 12% from February, when state and city officials ordered businesses to shut to prevent the virus’s spread.

“It’s only a partial recovery from where we were. I’m not sure that it can be sustained,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. Consumer spending and economic growth won’t return to normal levels “unless there’s a vaccine, a health response that makes people feel safe.”

Consumer sentiment remains depressed from near all-time highs reached during the last expansion, and slipped in the latter half of June. And Americans overall pocketed more than a fifth of their disposable incomes last month, an exceptionally high savings rate that signals caution.

But the federal stimulus package, coupled with the urge among many Americans to get out and spend after months of being cooped up, is likely helping the economy grow again.

Married couple Chip Hoagland and Sarah Wiley have been saving money by not going out to eat or taking trips. That has freed up income to add a studio behind their 1955 ranch house in Falls Church, Va., and buy a used Dodge Caravan.

Mr. Hoagland, a 59-year-old bioenergy company executive, also bought cars during the 2008 and 2001 recessions. “I usually buy when it’s low,” he said. He visited three dealerships last month. “Clearly they weren’t moving their cars. I was able to negotiate what I thought was a fairly good deal.”

Ms. Wiley, a 55-year-old artist, is about to complete construction on a studio space in her backyard that she began nearly three years ago but had paused until the pandemic. She recently bought an air-conditioning unit. “We’re just not going on any even little road trips or staying in motels or going on vacations or eating out,” Ms. Wiley said. The couple also recently bought trees for their yard.

Last month’s spending increase was fueled by stimulus money—one-time checks of up to $1,200 for individuals and $2,400 for couples—along with enhanced unemployment benefits, set to expire this summer. Research shows that low-income families were among the quickest to spend that money.

Meanwhile, the U.S. on Thursday marked a daily record of almost 40,000 new infections, and Texas pulled back on some reopening plans.

Fresher data suggest consumer spending has lost momentum. Credit-card spending rose in May but slipped in the first half of June compared with a year ago, according to Earnest Research.

Friday’s report showed household incomes—despite falling from April’s inflated levels—are nearly 4% above pre-pandemic levels. Ms. Farooqi said once the stimulus money runs out and enhanced jobless benefits expire, incomes will fall and consumers will likely pull back.

For now, there are other signs consumer spending has picked up. Car sales rose in May after falling in prior months. Mortgage applications to buy homes have risen to multiyear highs. Restaurant bookings are slowly picking back up, even though they remain far below prepandemic levels.

One factor is cheap money. The Federal Reserve has lowered its benchmark interest rate to near zero, and consequently, the cost of borrowing for things like homes, cars, furniture and other big-ticket items has dropped to historic lows.

Low interest rates allowed Boston Interiors, a retail furniture chain in Massachusetts, to extend its standard refinancing plan for customers to 36 months from 24 months during the pandemic. That has allowed customers to buy bigger purchases while keeping monthly payments low, said president Peter Theran.

Mr. Theran opened five of the company’s nine stores in early June. In the roughly three weeks since, business has been solid, with same-store sales running about even compared with a year ago. The morning they reopened, four or five customers were waiting outside, eager to get in.

“People have been in their house so long, their perceived flaws in their home are enormous to them now,” Mr. Theran said. “Things they were only mildly annoyed by are suddenly unbearable.”

Write to Josh Mitchell at
-Gwynn Guilford contributed to this article.