Consumers Stash Surge in Incomes

Personal disposable incomes surged 13.4% in April from March but the gains are misleading. The Bureau of Economic Analysis (BEA) accounted for all stimulus payments, tax credits and unemployment benefits that should have been paid out due to the CARES Act but were actually held up for many consumers. State and local governments are still playing catch-up today on issuing unemployment benefits that applicants qualified for in late March and April.

Personal consumption expenditures plummeted 13.2% in April from March as consumers sheltered in place. Losses in spending were widespread with the exception of spending on basic necessities, including food at home. The drop in spending on medical services was particularly large as medical and dental offices closed or shifted to telemedicine in many states. People also stayed away from hospitals and medical offices for routine care for fear of contracting the COVID-19 virus. One of the great ironies (and many tragedies) of what is first and foremost a health crisis has been the decimation of health care jobs. This is the first recession ever when health care has been hit so hard with losses and layoffs. It was historically considered to be recession proof. The shift of resources from regular and routine care to COVID-19 has sapped the health care system of its profits. More layoffs are coming.

The PCE index, which the Federal Reserve targets for policy purposes, fell -0.5% in April from March. A sharp fall in oil prices exacerbated the drop in everything from big-ticket durable goods to services. The outlier was a jump in food prices, the one thing we need the most when sheltering in place and unable to work. Farmers forced to allow their crops to rot in the fields when restaurants shut down, added to the unusually high rate of COVID infections in agriculture, exacerbated shortages. Food lines swelled in April as consumers waited for stimulus and unemployment benefits that didn’t quickly materialize. The PCE decelerated to a 0.5% year-over-year pace in April, the weakest level since the last downdraft in oil prices in late 2015.

The core PCE, which excludes food and energy and didn’t mean much to consumers during the month, fell 0.4% in April from March. Year-over-year measures of the core PCE slowed to 1%, the weakest pace since late 2010. Fed Chair Jay Powell has made clear that he is much more concerned with the rising risk of deflation than a surge in inflation in response to COVID-19. Hence, his willingness to pull out all the stops to combat the effects of COVID-19 on the economy.

The saving rate surged to 33% in April, the highest on record. The primary reason for the rise in the saving rate is the fact that consumers literally had very few places to spend during lockdowns. Efforts by the statistical agencies to account for government aid also exacerbated the rise in saving as it boosted the amount consumers took in, on paper. Many are looking at the surge in saving as a positive for consumer spending going forward as they think it will allow for a more rapid recovery in spending once businesses reopen. The problem is that 1) some of the rise in incomes was a mirage and didn’t actually show up in the bank accounts of the unemployed until May and 2) the pent-up demand triggered by lockdowns will be hindered by the continued need for social distancing, ongoing fears of contagion in a world without effective testing and treatment, and no vaccine. The Beige Book, which tracks actual business conditions for the Fed, disappointed this week when it suggested that many of the temporary layoffs in April became permanent as the scope of the crisis hit home in May.

Another hurdle for spending is baby boomers who were already growing more skittish about spending and apt to save prior to the COVID-19 crisis. They are either near or in retirement and much more protective of their saving than in the past. They are also more likely to stay away from public spaces given their increased risks of contracting the disease and fatalities. Men over the age of 60 have been hit particularly hard by COVID-19. Baby boomers account for about one third of all consumer spending.

Bottom Line
COVID-19 is an extraordinary event. Those who attempt to use benchmarks from a pre-COVID world will miss many of the actual effects of COVID as it works its way through the economy. Incomes and spending will eventually pick up as the economy reopens but will remain well below previous peaks for some time to come. Look for the saving rate to fall from a record-breaking pace in April but remain elevated. Deflation is a greater threat than a surge in inflation in the near term.

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