We received some fairly stunning data out of the Bureau of Economic Analysis (BEA) last Friday. The government agency reported that Personal Income rose at a huge 11.7% rate in April compared to April, 2019. However, those income gains did not translate into increased spending as Personal Spending actually fell 16.7% for the month. The BEA also reported that the Personal Savings Rate, which tracks the amount that consumers save relative to Disposable Personal Income, spiked massively in April to 33.0% from 12.7% in March and an average of 7.9% in 2019. This data makes it fairly clear that consumers have experienced an historic shock to their confidence. Despite strong gains in income, which we discuss further below, people are scared to spend right now. And with the May unemployment rate expected to come in at nearly 20% on Friday, many people remaining in quarantine, and the lion’s share of retail stores closed across the country, it’s hard to see the situation improving much over the near term.
This is bad news for the federal government, which appears to have pulled out all the stops in its attempts to support the consumer and the economy. The chart below shows that Personal Income growth (blue line) was indeed very strong at 11.7% in April. However, the figure drops to -6.7% (orange line) if we exclude transfers payments (Social Security, Medicare, Medicaid, unemployment insurance, veterans’ benefits, and other transfers). In fact, that 6.7% drop in adjusted Personal Income in April exceeded the worst declines during the Global Financial Crisis.
Fortunately, the government did step in to provide relief to consumers struggling with job and income losses. The relief came in the form of direct cash payments, expanded unemployment benefits, paid sick leave, mortgage forbearance, and loans/grants to businesses to maintain payrolls (among other initiatives). Unfortunately, though, those payments will do little to stimulate the economy if consumers opt to save their benefits rather than spend them. We’re going to need to see a big change in consumer sentiment, and quick, if we expect to see the kind of V-shaped recovery that the stock market seems to be increasingly counting on. Perversely, the recent rise in stocks just may serve as the impetus to a change in consumer sentiment. We would caution, however, that the economic recession caused by COVID-19 is leading to further expansion in economic inequality. Sharp increases in stock prices cannot and will not be the sole, or even the primary, savior for this economy. We must begin to see the economic benefits of any economic recovery become more broad-based.
In the following table, we wanted to provide some perspective with regard to the scale of the transfer payments currently being distributed. From 1945 to 2019, the percentage of Personal Income attributable to transfer payments rose fairly steadily from about 3% in 1945 to 17% in 2019, with an average of about 11%. Similarly, transfer payments as a percentage of GDP rose from about 2.5% in 1945 to about 15% in 2019, with an average of about 9%. In 2020, we are highly likely to make all previous years look modest by comparison. Through the first four months of the year, transfer payments have contributed about 21% of Personal Income and represent about 20% of current GDP. The jump in transfer payments from about 15% of GDP in 2019 to 20% thus far in 2020 would normally be a huge shot in the arm for the economy. However, and at the risk of repeating myself, the stimulus will not be nearly as beneficial if the recipients of those transfer payments refuse to spend their benefits!
It seems reasonable that the next phase of COVID-19 economic relief, which will be the fourth round of legislation designed to protect consumers and businesses from the effects of the disease, might include more incentives for consumers (and businesses) to spend the money they receive. But how? How does the government encourage folks who are unemployed and/or financially insecure to spend more of their rainy day funds? Even if it’s possible, is it the responsible thing for government to do? This is the paradox of thrift that we’ve talked about many times over the past many years. What’s best for the economy is often not what’s best for individual consumers. Economics 101 taught us that consumers are unlikely to modify their spending based on transitory windfalls of income. Until and unless the legions of unemployed are put back to work and receiving steady paychecks, we don’t expect consumer spending rates to get anywhere near the levels prior to the COVID-19 crisis.