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
Employers through August have generated about 11 million jobs,
or about half of the 22 million lost at the start of the
Spending up to now has been supported by strong job growth after
pandemic-related closures ended and federal assistance to
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
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
"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
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
Write to Josh Mitchell at firstname.lastname@example.org
(END) Dow Jones Newswires
October 01, 2020 07:04 ET (11:04 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.