Personal Spending Rebound Falls Short of Forecasts
What is the old phrase, you can lead a horse to water but you can’t make him drink?
Using that analogy, the Federal Government and Federal Reserve have been pumping an unprecedented amount of water into our economy, trying to entice consumers back into stores and restaurants, and resume their old patterns of spending once businesses are able to reopen.
That reopening started in nearly all 50 states in May and we got an important update on how it’s all going this morning with the release of the May Personal Income and Spending report from the Bureau of Economic Analysis.
This fire hose approach to economic recovery is clearly visible in the aggregate personal income data from this report. While personal income fell 4.2% in May, the drop was less than the 6.0% drop economists were forecasting and follows a huge 10.8% gain in April as many household’s received large checks from the government and more folks found their way onto the unemployment insurance rolls.
The personal income windfall was so large over the past two months that personal income growth from a year ago jumped to new expansion highs, despite a national unemployment rate of 13.3% – a level of unemployment that far exceeds any seen during the Great Recession.
The details of the report clearly show government transfer payments are almost the only driver of personal income gains today. We are in the midst of a truly historic increase in government payments to U.S. households that dwarfs anything that has come before.
However, this government transfer windfall also highlights how vulnerable the U.S. economy and consumer spending is to any reduction or pull back of government support as long as the coronavirus pandemic rages.
Congress is considering another substantial rescue/spending package in July. Elements that are being considered include extension of unemployment insurance benefits, another direct payment to U.S. households, more support for state and local governments, protection for businesses from litigation, and more spending on infrastructure. If a substantial additional Federal spending package doesn’t materialize by the end of July, many small businesses, retailers, and restaurants will begin to feel even more intensely the long-term damage this coronavirus has done to the U.S. labor market and consumers’ willingness and ability to keep spending.
Stripping out these government transfer payments, one sees the danger of a prolonged slump in real consumer spending from the sharp decline in real personal income that would result without that government support. There was only a modest rebound in real personal income excluding transfer payments in May compared to what was lost in March and April. Real personal income excluding transfer payments was 7.3% lower than a year ago in April and still down 6.0% from a year ago in May.
The government reported personal spending increased 8.2% in May following a 12.6% decline in April. But in inflation adjusted terms, consumer spending was still 9.8% lower than a year ago in May – a 4 times larger decline in real consumer spending than the largest decline seen during the Great Recession. Moreover, real spending continues to lag real personal income growth, suggesting consumers are likely to remain a reluctant bunch as long as a coronavirus resurgence remains a threat. The gains made in May could be swiftly undone.
As if to emphasize that point, we received the final reading on the University of Michigan Consumer Sentiment index for June on Friday, which showed a measurable drop in consumer sentiment to 87.1 from the 87.8 initial reading taken at the beginning of the month as coronavirus cases jumped 54% in the U.S. over the last two weeks and are climbing now in 30 states.
To learn more, check out this week’s U.S. Outlook.