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Americans' paychecks are getting smaller, but their spending is soaring. Huh?

Consumer spending bounced back sharply in America last month. That's the good news. But paychecks got smaller at the same time, complicating hopes for a quick economic rebound.

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By
Anneken Tappe
, CNN Business
CNN — Consumer spending bounced back sharply in America last month. That's the good news. But paychecks got smaller at the same time, complicating hopes for a quick economic rebound.

Personal consumption expenditures -- i.e. spending -- jumped an unprecedented 8.2%, the Bureau of Economic Analysis reported Friday. It reversed from a revised 12.6% collapse in spending in April, when the economy ground to a halt and people stayed at home to limit the spread of Covid-19.

America's savings rate stood at 23.2% in May, down from 32.2% in April.

So far so good. Many economic indicators registered stark declines in April -- the height of the lockdown -- and rebounded in May, making the data very choppy. It looks like consumer spending fits that pattern, too. That's important because some two-thirds of America's economic growth are driven by consumer spending.

But the recovery story is not quite that simple.

While spending rebounded, personal incomes fell by 4.2% and disposable income declined by 4.9%.

The main reason for the drop: a lower level of government social benefits that were paid out to Americans. Most people cashed their stimulus checks already, so the sugar rush is wearing off. The Trump administration is considering a second round of stimulus checks, but nothing is decided yet.

That decline was partially offset by more unemployment claims being paid out in May, the BEA said. Under the CARES Act, the government expanded unemployment benefits, including adding $600 per week. But so far, the additional cash is only meant to be paid through the end of July.

For some, the enhanced benefits currently pay more than their previous wages.

Traditionally, lawmakers worried that too-generous unemployment benefits would keep people from wanting to go back to work. But in the pandemic recession, the text book can be thrown out of the window.

Even though claims for benefits are decreasing slowly, and a record 2.5 million jobs were added to the economy in May -- with a further 3 million expected in next week's June jobs report -- millions of Americans remain reliant on benefits to make ends meet. The unemployment rate remains above the level it reached during the financial crisis and this week's report from the Department of Labor showed nearly 20 million people filed for benefits for at least two weeks in a row as of June 13.

This means consumers, the main driver of economic growth in America, will remain constrained in their spending. That's why "cutting off a policy support that helps households maintain spending is a terrible idea, both for these households' welfare and for macroeconomic stabilization," said Josh Bivens, director of research at the Economic Policy Institute.

Bivens thinks extending the additional $600 of weekly jobless benefits through the middle of next year" would provide an average quarterly boost to gross domestic product of 3.7% and employment of 5.1 million workers."

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