U.S. consumer spending dropped a record-breaking 13.6% in April, marking the steepest monthly fall since 1959, as the coronavirus crisis forced widespread business shutdowns across the country, paralyzing the economy in the process. Personal income, however, rose 10.5%, bolstered by the government stimulus measures in response to the pandemic crisis, while the estimates were of a 5.9% decline.
Consumer spending in April, which drives roughly two-thirds of all economic activities in the United States, surpassed the previous all-time decline of 6.9% in March. Per the latest report, there was a steep decline in consumer spending across the board. Spending on both durable and non-durable items along with expenditure on services witnessed sharp declines in the period, with each recording a spending plunge of 17.3%, 16.2% and 12.2% respectively.
Meanwhile, the prevalent adversities pushed up the personal income rate by a record 10.5%. The increase partially reflects the annualized $3-trillion government grant credited to households in April under the Cares Act as well as consumers’ recent exercise of frugal spending. Minus the coronavirus relief package, income would have declined 6.3% with business shutdowns resulting in an 8% wage decline.
With higher incomes and spending cuts, Americans’ savings rate climbed to an all-time high of 33% in April from 12.7% in the prior month. This staggering rate of savings showcases COVID-19 as an influencer that brings about a change in consumers’ spending habits. Increasing rate of unemployment with job losses of 20.5 million due to COVID-19 in April this year in the United States, made consumers more cautious in their approach to spending. "The economics of fear and sudden stops were apparent in April as fearful and locked-down households cut back on spending," said Gregory Daco, chief economist at Oxford Economics. U.S. retail sales decreased 16.4% in April.
While many players like Macy’s M, Nordstrom JWN, Guess GES and Kohl’s KSS had to shutter stores to break the chain in the wake of the coronavirus outbreak, several struggling retailers like J.C. Penney Company, Inc. JCP, J. Crew, Neiman Marcus and Stage Stores were forced to file for bankruptcy protection. With consumers shying away from crowded places and limiting their visits to the brick and mortar stores, online retail received a significant boost in sales, benefiting companies, namely Amazon AMZN, which currently carries a Zacks Rank #3 (Hold), and Walmart among others amid this chaotic environment.
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Road to Recovery
Now that the lockdowns are being eased and businesses gradually reopening, the Trump administration believes, the economy will regain its momentum in the second half of the year. Large amounts of savings also instill optimism as consumers in a way are just deferring their current expenditure to the future.
Many economists, however, are less upbeat about the economic rebound amid the possibility of a second wave of COVID-19 outbreak and the absence of any vaccine against the virus. Economists warn that even with the unwinding of economy and lifting of stay-at-home orders, Americans will continue to go slow before venturing out and spending freely again. It is still unclear how long it will take to overcome this unprecedented economic upheaval and what its retrieval would look like. “Some of the data suggests stabilization,” reckons Kathy Bostjancic, chief U.S. financial economist, Oxford Economics. “It’s still overall a very tentative, slow recovery.”
Although the coronavirus aid package has helped many Americans stay afloat over the past two months, consumer spending must bounce back for the economy to recover. Despite some laid-off employees being called to rejoin work with gradual re-openings nationwide, the job market looks extremely depressed with bleak output for the rest of the year.
It seems that the economy is currently dependent on the largesse of the federal government but for how long will the government keep sending out welfare payments, that is a vital point to ponder. What will be the potential consequences if the financial aid checks dry up? While we don’t have answers to these questions, only time will show how and when the economy will be bailed out of this virus-fuelled downturn.
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