By Josh Mitchell 

The U.S. economy is rebounding quickly from the pandemic-induced recession but faces a potential new hurdle: a drop in household income that could restrain consumers' spending.

The Commerce Department will offer the latest snapshot of household finances Thursday at 8:30 a.m. ET. Economists expect the report to show that consumers continued to increase spending in August while their income, in the aggregate, fell mainly because of a drop in government aid for unemployed workers.

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.

Other key economic readings point to a slowing recovery. Jobless claims remain elevated compared with pre-pandemic levels. 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.

Employers through August have generated about 11 million jobs, or about half of the 22 million lost at the start of the pandemic.

Spending up to now 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.

Hannah Purdy, a 28-year-old from Boise, Idaho, and her husband cut spending in the spring out of fear of losing their jobs at a hospital, where she is a revenue-cycle analyst and he is a mechanical engineer. When that didn't happen, they started increasing their spending this summer. They remodeled their basement and, last month, installed hardwood flooring.

Now, they say, their spending habits have reverted to normal.

"We are both feeling a little bit better about the economy," she said. "I don't necessarily feel better about the pandemic but I feel better about our ability to figure out how to operate effectively around the realm of a pandemic."

Their disposable income has actually increased this year. After the Federal Reserve cut interest rates, the couple refinanced their mortgage at a lower rate, saving them $300 a month. On top of that, they say, real estate websites indicate that their home has increased in value, so they are feeling wealthier.

This fall, she plans to take her first trip since March -- to Tennessee to visit her parents. She said that overall, though, they remain cautious and are pocketing much of their income rather than spending it.

One positive sign: Households have gained confidence in the recovery. The Conference Board, a private research group, said this week its index of consumer confidence surged in September to the highest level since March. Higher confidence makes it more likely that consumers will spend rather than save -- and boost the overall economy.

Write to Josh Mitchell at joshua.mitchell@wsj.com

 

(END) Dow Jones Newswires

October 01, 2020 07:04 ET (11:04 GMT)

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