The September consumer spending and income report exceeded economists’ forecasts again.
In real terms, consumer spending increased at a robust 15.9% annualized pace in September, nearly ensuring consumers will continue to increase their spending at a healthy pace over the holidays too.
Durable goods spending is up 14.3% from a year ago even as personal services spending has declined 6.5% from a year ago.
John Maynard Keynes is alive and well in 2020. Economic policy makers have gone back to their 1930’s playbook to get the U.S. economy out of this pandemic recession, the deepest U.S. and global downturn since the Great Depression.
One lesson of the Great Recession (2007-2009) was that without government stimulus far greater than the loss in economic activity, the economy could take a decade or more to get back to full-employment. In 2008, the Bush Administration got Congress to pass the Economic Stimulus Act of 2008, a $152 billion dollar tax rebate bill that gave each eligible tax payers $300 to $1,200 each, depending on if they were married or had dependents. By early 2009, it was obvious to all that $152 billion was not going to even make a dent in the economic and financial hole Americans found themselves in.
So in February 2009, the American Recovery and Reinvestment Act was passed, which amounted to a far higher $831B in added stimulus from 2009 to 2019. About $288 billion went to tax relief, $144 billion to state and local fiscal relief, and $111 billion in infrastructure spending, among other categories. This additional stimulus helped to stabilize financial markets and ignite an economic recovery that began in the second half of 2009 and started creating net new jobs by January 2010. But at the time the American Recovery and Reinvestment Act was passed, many economists, including myself, concluded that the size of the fiscal stimulus package was not large enough.
State and local tax revenues plunged and state budgets were slashed to balance the budgets, leading to another four years of state and local government job losses that held back overall job creation and the pace of economic recovery, even as the expansion continued. Outside of a brief surge in government payrolls during the 2010 Census, total government payrolls from a year ago didn’t start growing again until the summer of 2014.
The result was years of elevated unemployment that didn’t need to occur. The U.S. unemployment rate didn’t reach its pre-Great Recession low of 4.4% from May 2007 until March of 2017.
If we wait another decade for full-employment to return, a whole generation of young Americans could see their skills atrophy and lose countless job opportunities. Eight months in, this pandemic is already a public health tragedy with nearly 229k American’s dead, but another decade of lost economic activity, would probably be enough to sideline the United States as the world’s preeminent global economic power for good.
Keynes’s theory is simple, when aggregate spending from consumers and businesses is far below full-employment levels, like during a sharp recession, there is scope to change the undesirable economic equilibrium by using the power of the government and its unique ability to borrow at a risk-free rate to supplement and support the spending power of the private sector. This can be done indirectly by cutting taxes, but more effective is direct government transfers and spending.
It’s a testament to the effectiveness of trillions of dollars of government transfers through traditional fiscal stabilizers like unemployment benefits and direct payments to taxpayers that U.S. consumer spending came roaring back at a 40.7% annualized pace in the third quarter. Fiscal stimulus to date is more than 3 times what the Federal government provided in the decade during and after the Great Recession.
Despite the expiration of expanded unemployment benefits at the end of July and others, the U.S. economy is still expanding on the direct fiscal support that helped swell aggregate personal income and saving rates. About two-thirds of households that received fiscal support during this pandemic have been able to use some of it to pay down existing debts or bolster their savings. This pushes back the danger of insolvency for millions and keeps the pandemic economic shock from morphing into a full-blown financial crisis that could amplify homelessness and unemployment that could take decades to recover from.
Seeing the success of the economic policies to date, the Congress should double down on this fiscal stimulus strategy in 2021 with extended pandemic assistance for state and local governments, small businesses, and the unemployed, while supplementing these measure with added infrastructure, education, and health spending to keep another lost decade from occurring. These outlays will have the added benefit of laying the ground work for faster economic growth for our children’s future.
To learn more, check out this week’s U.S. Outlook Report.
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Over the near-term, U.S. economic growth fundamentals look set to deteriorate. Yet U.S. stock prices remain close to record highs and long-term Treasury yields have moved up 10 to 15 basis points in the last week alone on prospects for sizable fiscal stimulus and a new Democratic administration. The markets are clearly trying to look past near-term signs of trouble, while focusing on a brighter 2021.Read More ›
Retail sales increased 1.9% in September, a far stronger pace than economists expected, given tens of millions of Americans remain out of work and supplemental unemployment benefits of $600 a week began to disappear at the end of July.Read More ›
In many ways the consumer is the U.S. economy.
Real consumer spending comprises about 70% of U.S. GDP, so if you can accurately forecast where the consumer is going, you have a pretty good idea the rest of the U.S. economy will follow. Personal consumption expenditures is a broad measure of consumer spending, including spending categories not included in the monthly retail sales reports like spending on services like health care and education.Read More ›
The September jobs reports brought more troubling signs that the labor market rebound that began in earnest in May as furloughed workers returned to work and peaked in June with a one month 4.78 million job gain is rapidly petering out as winter approaches.Read More ›