A drop in household income and persistently high layoffs are
threatening to further slow the U.S. economic recovery, which already appears
to be losing momentum as the pandemic continues.
Personal income—what households received from salaries,
investments and government aid—fell 2.7% in August as enhanced unemployment
checks shrank, the Commerce Department said Thursday. Meanwhile, another
837,000 workers filed for unemployment compensation last week after being
recently laid off, the Labor Department said. In total, nearly 12 million
workers are receiving unemployment compensation through regular state programs.
The level of weekly jobless claims shows layoffs remain
persistent in some industries, and more companies announced cuts this week.
American Airlines Group Inc. and United Airlines Holdings Inc. told employees
they will go forward with more than 32,000 job cuts Thursday, after lawmakers
were unable to agree on a broad coronavirus-relief package. Insurer Allstate
Corp. on Wednesday said it planned to lay off 3,800 employees. Walt Disney Co.
on Wednesday announced permanent layoffs for 28,000 theme-park workers who were
previously on temporary furlough.
The economy up to now has rebounded more quickly than many
economists thought. But with federal aid fading and job growth slowing,
consumer spending—the key driver of economic activity in the U.S.—could weaken.
Economists believe the recovery is entering into a modest and more grinding
phase.
“There’s clear evidence that growth is decelerating,” said
Michael Gapen, chief U.S. economist at Barclays. He said, however, that the
risk of a double-dip recession is low, in large part because households have
built up their savings during the pandemic. “There’s still quite a bit of
saving and liquidity out there. It’s likely to support spending for another few
months.”
Despite the drop in August, household income was 2% above
its level in February, the month before the pandemic hit the U.S. Income has
been boosted by one-time federal stimulus checks, stock-market gains, and
enhanced unemployment insurance payments. Meanwhile, lawmakers and the White
House remain at odds on a new round of coronavirus aid, including additional
aid for laid-off workers.
Consumers increased spending over the summer, as they made
up for purchases they put off during the spring and bought goods such as
bicycles, cars, groceries and home improvements. But the August boost to
spending of 1% was far smaller than earlier in the summer when spending grew 9%
in May, 7% in June and 2% in July. Spending on services—such as restaurant
outings, hotels, and air travel—remains depressed.
The labor market’s recovery also is showing signs of slowing
down since the summer. Employers through August have generated about 11 million
jobs, or about half of the 22 million lost at the start of the pandemic, with
the bulk of the gains coming in May through July.
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.
Still, economic readings suggest the economy rebounded
quickly in the third quarter that ended Wednesday after contracting sharply in
the second quarter.
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.
Spending 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.
Economists have long used letters of the alphabet like V and
U to describe economic recoveries. But the coronavirus downturn is so different
from past recessions that economists are coming up with new shapes to describe
the potential recovery. WSJ explains. Illustration: Jacob Reynolds
—Eric Morath contributed to this article.
Write to Josh Mitchell at joshua.mitchell@wsj.com.
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