KEY DATA: Consumption: -13.6%; Disposable Income: +12.9%; Wages: -8.0%; Savings Rate: 33.0%; Prices: -0.5%; Ex-Food and Energy: -0.4%/ Sentiment: up 0.5 point
IN A NUTSHELL: “Right now, the economy is totally dependent upon the largesse of the government.”
WHAT IT MEANS: The horrible April data continued today as consumer spending collapsed in April. The percentage decline was nearly seven times the previous largest drop. You just don’t see numbers like that. Consumption of durables, nondurables and services were all down by double digits, so you cannot simply ascribe the collapse to just a fall off in vehicle purchases. On the income side, the numbers were totally different, but just as worrisome. Income surged, but it was all due to an additional $3 trillion in government payments, a 90% increase. However, wages and salaries were down nearly $880 billion, an 8% drop. Rising income, regardless of the source, coupled with cratering spending led to a record-high savings rate of 33%. That is nearly double the previous peak. Households are saving for the rainy day that is already here. On the inflation front, prices were down fairly sharply. We started off the quarter with consumption falling at a greater than fifty percent annualized pace, compared to the level of spending in the first quarter. That will likely moderate going forward, but it shows the huge hurdle the economy faces in getting back to more normal levels of consumption. It also explains why some forecasters have growth declining by upwards of forty percent in the quarter. I have been at -22%, but it is early. Hopefully, some of the savings will be put to use in May and June and the decline will be less than feared.
Will consumers spend more going forward? Undoubtedly yes, but the issue is how much? Confidence will be the key and the University of Michigan’s Consumer Sentiment Index was a disappointment. The final May number was just a touch above the April level and was below the mid-month reading. Current conditions were up from April, but expectations were down. That is worrisome, as the reopening of the economy should have caused households to be more confident about the future. So far, it hasn’t.
IMPLICATIONS: Nearly two months ago I posted my view on what I expected the recovery to look like. I called it a “Big V little u” recovery. That is, the third quarter would be strong, the fourth solid but afterward, the expansion would lose steam. My biggest concern was what would happen when the economy had to stop depending upon government assistance and the private sector would have to stand on its own. The income numbers show just how reliant the current economy is on government welfare. Some of the savings will be spent over the next few months, but if concerns about the future that we saw in the University of Michigan’s survey continue, don’t look for a surge in demand. Regardless, the extra funding will start running out during the summer. What will the economy do then? Will the federal government keep sending out checks or will the household and business welfare payments dry up? Will state and local governments be able to keep cutbacks to a minimum or will the unwillingness to provide funding similar to what has been given to businesses and households lead to major spending and payroll reductions? Income gains will have to come from private sector job growth that is not limited to the reopening of businesses. We are likely to have an unemployment rate in the 10% range even at the end of the year and that means total personal income would be below where it was at the end of 2019. These were all the points I made two months ago and the data seem to be supporting my concerns. I am not trying to be negative; it’s just that I believe it is time to get realistic about the potential for growth over the next year, not the just next few months.