Income dynamics in May suggest that policymakers need to act sooner rather than later to support struggling American workers to avoid a quickly approaching fiscal cliff on July 31.
The May figures imply that the U.S. household remains impaired despite millions being recalled to work.
On a year-ago basis, personal income excluding government transfers declined 6% following a revised 7.2% drop in April, the Commerce Department reported on Friday.
While that metric increased 1.5% in May, as workers were recalled, overall income declined 4.2% on the month and disposable income fell 4.9%, all implying that the U.S. household remains impaired despite millions being recalled to work.
However impressive the data on recalled workers is — we expect 3 million in May — they are dwarfed by the 30 million who are on some form of public aid and the millions more still working but taking pay cuts. And on the horizon is the expiration of Pandemic Unemployment Assistance, which is scheduled to run out on July 31.
The U.S. savings rate declined to 23.2% from a revised 32.2% in April. In our estimation, this is because of a general pullback by the two upper-quintiles of income earners (40% of households) who are responsible for 61.4% of spending.
It is certain that some of that savings made its way into financial markets, which have soared over the past two months. But it is clear that following the one-time bounce in spending observed this month, income and savings dynamics are moving in a direction that suggests that a general paradox of thrift has, for now, captured wealth households.
An expected rebound in spending following the reopening of many economies around the country materialized at an 8.1% pace in May. But spending on a three-month annualized basis declined 39.4%, which underscores our forecast of a decline of 38.5% in the second-quarter gross domestic product.
Core inflation on a year-ago basis increased 1%, which is well below the Federal Reserve’s 2% target. Inflation dynamics continue to imply that risks around the outlook remain skewed toward mild deflation going forward, in part because of what will be a restrained spending environment at best.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
