Americans increased their spending by a modest amount in February but the expectation is that spending will be hit hard in coming months reflecting the shutdown of the American economy by the coronavirus.
The Commerce Department reported spending edged up 0.2 percent in February, matching the January gain but below the 0.4 percent increase in December.
Personal incomes rose a solid 0.6 percent in February, matching the January gain. Those strong increases are likely to fall-off as millions of Americans lose their jobs although the Senate has passed a $2.2 trillion economic relief package that would cushion the blow by providing checks of up to $1,200 to individuals and expanding unemployment benefits.
The hope is that the relief package, will keep the economy from falling into a deep recession because of the shutdowns. The Federal Reserve has also moved to slash its key interest rate to a record low near zero and is providing billions of dollars in support to keep credit flowing.
Economists have said all these efforts will not be enough to keep the country out of a downturn, but they could help promote a stronger and quicker rebound once the virus is contained.
A key inflation measure was up 1.8 percent for the 12 months ending in February, according to the latest data, below the Fed’s 2 percent target. The absence of inflation worries has allowed the central bank to focus on supporting economic growth.
Consumer spending accounts for 70 percent of economic activity but surveys are already showing the virus is having a big impact on the biggest driver of the economy. Coresight, a data research firm, found that almost half of U.S. consumers — 47 percent — are now extremely concerned about the outbreak, up 10 percentage points in just one week.
“With high-frequency data showing a collapse in economic activity over the past couple of weeks, overall consumer spending is likely to have plummeted in March,” said Andrew Hunter, senior U.S. economist at Capital Economics.
Hunter said he was expecting around a 40 percent decline in consumer spending in the April-June quarter.
Many economists believe that a recession has already begun although they are forecasting it could be a short one, lasting only two quarters, if the government’s efforts to contain the coronavirus are successful.
The Trump administration is hoping to get the new programs in the $2.2 trillion relief package up and running quickly. Treasury Secretary Steven Mnuchin said Friday he wanted to get a program to supply small businesses with bank loans operational in a week and IRS payments of up to $1,200 per individual being sent to households in three weeks.
Asked in an interview on Fox Business Network about the record 3.3 million applications for unemployment benefits reported on Thursday, Mnuchin said, “These numbers matter because people are losing their jobs.” But he said the government programs in the rescue bill should either get people back to work or supply financial support until they can find new jobs.
The 1.8 percent 12-month rise in the inflation gauge tied to consumer spending has been below the Fed’s 2 percent target for more than a year and now is expected to fall even lower with the drop-off in economic activity and a big fall in energy prices.
The spending report said that the personal saving rate rose in February to 8.2 percent of after-tax income, the highest level in 11 months and up from 7.9 percent in January.