U.S. Consumption May See Quick Pickup If Lockdown Is Short-Lived

U.S. consumer spending may experience a strong bounceback thanks to the governments $1,200 stimulus checks and unemployment funds, according to a European Central Bank working paper.

“We estimate that the combination of expanded unemployment insurance benefits and stimulus payments should be sufficient to allow a swift recovery in consumer spending to its pre-crisis levels,” they wrote. However, if the shutdown lasts for a year and the unemployment rate hits 20%, “we find that the return of spending toward its no-pandemic path takes roughly three years.”

Although recent U.S. data has proved better than expected, Atlanta Federal Reserve chief Raphael Bostic earlier this week cautioned that parts of the economy are showing signs of leveling off amid a resurgence in coronavirus cases.

The U.S. Congress is debating more stimulus measures, which the White House is pushing for before lawmakers August recess. The $600 weekly in additional unemployment benefits that were passed as part of the March $2 trillion CARES Act are set to expire at the end of the month.

The paper published by the ECB said that while people who kept their jobs increased their savings, CARES Act stimulus meant consumption by those who lost their jobs recovered a year faster than it otherwise would have. As for those with little hope of reclaiming employment, the marginal propensity to consumer is lower because theyre bracing for a longer time without money.

In fact, the authors argue they may even be underestimating the scope of bounceback. For technical reasons, their model doesnt include purchases of durable goods.

“It is plausible that, when the lockdown ends, people may want to spend more than usual on memorable or durable goods to make up for earlier missing spending,” they said.