With one in four American workers looking for employment or waiting to be recalled to work, there is little doubt that the weak spending environment will partially define the U.S. economic narrative and policy going forward. The Commerce Department’s report on Friday of a 10.5% increase in income, due to U.S. federal government income supports and compositional effects of so many losing their jobs, is indicative of the fiscal cliff the economy is approaching; the 13.6% drop in spending clearly illustrates the policy challenge ahead. Personal income excluding government transfers declined by 6.3%. To put that in perspective, the spending rate dropped by a 29.2% rate on a three-month average annualized pace, even with the generous income support put forward by the government.
Depression is a choice, not a fate.
With 40.8 million people having lost jobs and income over the past ten weeks, there will clearly be a significant economic challenge if the policy support for households is not extended. The third quarter economic rebound that the market has priced in, and is part of the explanation for elevated equity valuations, is not going to happen without more fiscal aid in the pipeline.
Lost jobs and income thus far have been partially offset by the $1,200 aid check sent to most citizens and the extra $600 per week distributed to those put out of work due to the pandemic. In fact, that is the reason why personal disposable income inside the data has not completely collapsed, and increased by 12.9% in April. With the $1,200 one-time check likely exhausted and the $600 extra per week set to end in July, the direction of income and spending will quickly become far more important than the rise in the stock market or the modest reopening of the economy.
The PCE inflation readings drawn from the data support the notion of disinflationary conditions prevailing with a significant risk of deflation in the near to medium term. The top line arrived at a 0.5% increase and the core, excluding food and energy, arrived at 1%. The data inside that series showed a 1.9% decline in goods prices, a 2.2% drop in the cost of durables, a 1.7% drop in nondurables and a 1.7% increase in service prices. While food was up 3.9%, energy costs dropped 17.6%.
Just as important–the personal savings rate increased to 33% in April. In our estimation, this is likely due to high-end consumers (the upper 40 percent of households that account for 61.4% of spending) pulled back on outlays in April. This would be an example of the paradox of thrift or the increase in savings that results in a decline in aggregate demand, employment and eventually savings. To be honest, this is a function of the depression-like shock that the economy has absorbed. However, the initial response to that shock underscores our core outlook: depression-like shock, no depression. Now, we need to see the fiscal and monetary authority follow through to create the conditions that support our view. Depression is a choice, not a fate.
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