By Josh Mitchell
U.S. household income fell sharply in late summer while worker layoffs remained high, developments that could weigh on an already-slowing recovery from the coronavirus pandemic.
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 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 weekly unemployment insurance payments.
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.
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.
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.
--Eric Morath contributed to this article.
Write to Josh Mitchell at joshua.mitchell@wsj.com
(END) Dow Jones Newswires
10-01-20 1448ET
