The pandemic-induced recession, which was characterized by its speed and severity, is rapidly becoming a memory as the economy shows remarkable signs of regaining its footing. Spending has reached its pre-pandemic level and we anticipate that June will mark the turning point at which the economy moves beyond recovering lost ground and enters a period of expansion.
We anticipate that June will mark the point at which the economy moves beyond recovering lost ground and enters a period of expansion.
The National Bureau of Economic Research, which declares the beginning and end of recessions, has not yet announced the end of the most recent recession. We expect that it will identify the third quarter of last year as that moment.
During March and April, the revitalization of income and spending and a sharp decrease in savings appear to suggest that gains in employment are in store as the summer approaches. We expect a net gain of 615,000 jobs and a decline to 5.8% in the unemployment rate when the May jobs report is released on Friday. Within that report will be the potential for the normalization of consumer demand and a sustained economic upturn.
Government transfers and employment gains have managed to close the pandemic income gap. Real personal income in April was 0.3% higher than in February 2020, the month before the economic shutdown, and those gains are a sign of robust recovery and expansion.
Personal income in real, or inflation-adjusted, terms had been in general decline from 2012 to 2020 as higher-paying manufacturing jobs were replaced by lower-paying service-sector employment.
We would argue that diminished expectations for higher rates of income resulted in increasing rates of precautionary savings and altered spending behavior in the years before the pandemic.
These are the long-term trends that still need to be addressed. But the recovery of household income is nevertheless an important step in the right direction.
Personal consumption expenditure
Income is up, and so it should not be a surprise that spending in March and April came in 1.8% higher than pre-pandemic levels from February 2020.
Personal consumption has been in overall decline since the 1960s and 1970s, dropping lower after each major downturn as the population aged. As our analysis shows, after bouncing back from severe belt-tightening during the Great Recession, the growth of household spending resumed its trend decline during the five years before the pandemic.
Nevertheless, the increase in spending this spring—after months of austerity—is a testament to the infusion of liquidity into household balance sheets. We expect spending to increase during the months ahead as vaccinations continue and as consumers make up for lost time.
Savings can be a sign of uncertainty and a drag on economic growth as precautionary savings overwhelm the propensity to consume. As this past year showed, business-cycle factors like perceptions of employment security determine individual savings rates. There is also the effect of income on savings—the more income you have, the more you can save above day-to-day expenses.
There was an outsized increase in personal savings last year that took more than $5 trillion off the table at the depths of the pandemic. A year later, the level of savings is showing signs of normalizing, but remains twice as high as in February 2020 and $2.1 trillion above pre-pandemic norms.
Savings as a percent of disposable income
During the months before the pandemic, U.S. households saved about 6.2% of their disposable income. By April 2020, that figure had surged to 34%. A year later, the savings rate has receded to 14.9%, but that’s still twice as much as its 1970-2019 non-recessionary average.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.