Consumers Cautious Pre-Crisis

Personal disposable income jumped a respectable 0.4% in February after adjusting for inflation. That follows a gain of 0.5% in January and was driven by robust gains in employment for February. The preliminary estimate for payroll employment showed a gain of 273,000 jobs in February before the COVID-19 crisis prompted a surge in layoffs.

Consumer spending came in at much more muted 0.1% after adjusting for inflation. Gains in consumer spending have been rising at a 0.1% pace for the last three months despite strong gains in incomes and a jump in mortgage refinancing activity. The saving rate increased to 8.2%, the highest level in nearly a year. Consumers are saving the extra cash generated by mortgage refinancing instead of spending it. This reflects the surge in the number of baby boomers who are near or in retirement. They are much more worried about having enough money to live on in retirement than in keeping up with the Joneses at this stage in their lives. A higher propensity to save is also evident in the reaction by baby boomers to stock market moves. Strong gains in stock prices show up as little to no additional consumer spending, while drops in the value of stock prices show up as a pullback in spending activity by boomers. This higher propensity to save among boomers could be one of many factors that limit the bounceback in economic activity that many seem to be expecting once the COVID-19 crisis has passed.

Spending on services, mostly on energy, offset a drop in spending on motor vehicles. Spending on nondurable goods was also weak. An unusually warm winter dramatically curtailed spending on winter wear. Spending on services, with the exception of health care, has come to a near standstill across much of the country in recent weeks. Spending is concentrated on the treatment of COVID-19 as opposed to other health problems. Many dentists’ and doctors’ offices have either closed or dramatically scaled back their services during this crisis. There is a very tangible concern that COVID-19 will overwhelm hospitals in the weeks to come and delay critical care for non-COVID-19 heath problems. This has already occurred in Italy and is beginning to occur in the worst affected markets, notably parts of New York state.

Separately, the personal consumption expenditures (PCE) index moved up 0.1%, the same as last month. Easier comparisons to January and February 2019 pushed the overall index to a 1.8% gain from a year ago. That marks a sharp improvement from the tepid 1.3% year-over-year gains we saw last Fall but means little given the downdraft in energy prices and deflation we are expecting to see from the blow to demand tied to COVID-19 closures.

The core PCE, which the Federal Reserve targets, moved up 0.2% in February and edged up to a 1.8% gain from a year ago. In the pre-COVID-19 world, those gains would have been encouraging to the Fed, which was looking for the economy to show a little heat in 2020. Now they are just a sad reminder of the world we left behind. Concerns about a COVID-19-induced deflation have supplanted hopes the economy would finally see enough of a surge in wages to push inflation a little higher in 2020.

Bottom Line
The personal income and outlays report for February largely reflects a pre-COVID-19 world. It does reveal a certain skittishness among baby boomers and their willingness to spend, which could be one of many factors that dampen the speed with which we ramp back up again. Boomers, who are close to retirement and at higher risk for the worst consequences of the disease, will not be quick to return to spend at public venues, including restaurants and stores, until they feel safe.

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