WASHINGTON (Reuters) – American consumers cut spending the most for the second consecutive month in April, while boosting savings to record levels, and growing frugality has heightened expectations that the economy could take years recover from the COVID-19 pandemic.
On Friday, the Commerce Department report, as well as news of the collapse in monthly exports, let economists anticipate the largest contraction in gross domestic product in the second quarter since the Great Depression of the 1930s. Data were also dismal this month in the labor market, manufacturing production and residential construction.
Commerce said consumer spending, which accounts for more than two-thirds of US economic activity, plunged 13.6% last month, the largest drop since the government started tracking the series in 1959. It overshadowed the historic drop of 6.9%. in March.
Economists polled by Reuters had forecast that consumer spending would drop 12.6% in April. Expenses were depressed by lower healthcare spending as dental offices closed and hospitals postponed elective surgeries and elective visits to focus on patients with COVID-19.
The disease has killed more than 100,000 people in the United States, the highest death toll in the world.
Spending fell in restaurants, which moved to delivery and pickup services only, as well as hotels and motels. Spending on food and drinks fell in April.
But the COVID-19 crisis boosted consumer incomes in April, as the government’s historic budget program, worth nearly $ 3 trillion, distributed one-off checks of $ 1,200 to million people and increased unemployment benefits for the estimated 31 million unemployed to cushion economic hardship. caused by the pandemic.
Personal income jumped from a record 10.5% last month after falling 2.2% in March. Savings have climbed to a record $ 4 trillion, with the savings rate hitting a record 33%. But business closings weighed on wages, which fell 8.0% in April after falling 3.5% in March.
“The savings rate is both an opportunity and a warning,” said Chris Low, chief economist at FHN in New York. “If the economy reopens quickly without consequence, these savings represent considerable purchasing power in the second half. If it takes longer to reopen the economy, these savings will be used for subsistence over the next few months. ”
The economy is gradually reopening after the closure of non-core businesses in mid-March to slow the spread of COVID-19, which suggests that the economic recession has bottomed out.
Wall Street stocks were trading lower as investors prepared for an American response to China’s national security law in Hong Kong. The dollar fell against a basket of currencies, while prices of the US Treasury rose.
In a second report on Friday, the Commerce Department said merchandise exports fell 25.2% to $ 95.4 billion in April, a 10-year low. The sharp drop in exports was caused by a 65.9% collapse in shipments of motor vehicles and parts. This exceeded a 14.3% drop in imports. As a result, the goods trade deficit widened 7.2% to 69.7 billion last month.
The larger merchandise trade deficit is likely to weigh on gross domestic product in the second quarter, which economists say could drop to 40%, a pace not seen since the 1930s.
The economy contracted at an annualized rate of 5.0% in the last quarter, the sharpest decline in GDP since the fourth quarter of 2008. Consumer spending fell at a rate of 6.8% , the largest drop since the second quarter of 1980.
With consumer spending down in April, inflationary pressures were weak, with the Personal Consumption Expenditure Price Index (PCE) excluding the volatile components of food and energy products declining 0.4%. This was the largest drop since September 2001 and followed an unchanged reading in March.
During the 12 months to April, the so-called core PCE price index rose 1.0%, the smallest increase since December 2010, after an increase of 1.7% in March. The core PCE is the Federal Reserve’s preferred measure of inflation. The US central bank has an inflation target of 2%.
“The base decline in the PCE reflects some major price slumps in a limited number of the most affected services,” said Andrew Hunter, senior US economist at Capital Economics. “This is not evidence of widespread Japanese-style deflation that trapped America.”
Report by Lucia Mutikani; Editing by Paul Simao and David Gregorio