John Maynard Keynes’ paradox of thrift is increasingly becoming a much larger part of the economic narrative in the United States as households prepare for an extended economic slowdown, elevated unemployment and loss of income.
During March, the U.S. savings rate jumped to 13.1%, which did not bolster retail sales as Americans continued to shelter in place during April, resulting in a 16.4% decline in top-line retail sales, according to Commerce Department data released on Friday.
We expect the savings rate to continue to rise and that should serve as a potent reminder of Keynes’ paradox of thrift — that an increase in savings under current conditions could result in reduced aggregate demand, declining output and, if sustained, a decline in savings.
It is imperative that the fiscal authority step forward with another round of aid as soon as possible. While April will most likely prove to be the nadir in U.S. retail sales, we are not expecting a meaningful near-term rebound in sales because of the significant dislocation in the American labor market and clearly diminished income horizons for the near future.
On a three-month average annualized pace, top-line retail sales declined 35.7%, while the control group that feeds into the quarterly estimate of gross domestic product dropped 30.2%. Excluding autos, it was down 28.2%, ex-gasoline 32.9%, ex-autos and building materials 23.4% and ex-food service 2.1%.
This data strongly underscores our forecast of a 38.5% decline in gross domestic product for the second quarter, which may prove to be somewhat optimistic given the collapse in the data.
The detail inside the data set was devastating. The only positive was the increase of 8.4% in the proxy for e-commerce. Outlays on motor vehicles and parts fell 12.4%, furniture 58.7% electronics 60.6%, building materials 3.5% and food and beverages 13.1%. Spending at gasoline stations declined 28.8%, clothing 78.8%, sporting goods 38%, department stores 28.9% and eating and drinking establishments 29.5%.
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