KEY DATA: Income: +0.6%; Spending: +0.2%; Prices: +0.1%
IN A NUTSHELL: “Households have money to spend, but with all that is happening, it is not clear they will spend it.”
WHAT IT MEANS: The key to keeping the economy going is the reaction of households to all that is swirling around them. It is not clear what people will do. They have the money to spend, but for how long is the issue. Personal Income rose solidly in January. But the details are a little questionable. Wage and salary increases early in the year have been driven by increases in the minimum wage and while that is still happening, the gains are slowing down. Thus, worker compensation did rise decently in January, but much less than it did in January 2019. The biggest increase was in government transfer payments, especially for Social Security. So, while the increase in income was large, it may have been only temporary. In 2019, there was a surge in personal income but that faded as the first half of the year wore on. I suspect the same will happen this year.
As for consumer spending, it was moderate, at best. Most of it came from a jump in durable goods demand – mostly vehicle sales. The motor vehicle selling rate is trending down, though in a saw tooth pattern. Thus, you get some ups even as demand fades. When adjusted for inflation, which low, consumption rose modestly. Indeed, we have started the quarter off growing at a 1% pace. If the issues with the coronavirus and the markets affect consumer spending, we could see a very weak first quarter consumption number.
MARKETS AND FED POLICY IMPLICATIONS: In the midst of the stock market chaos/ panic, it is worthwhile to step back and ask the question whether the huge selloff makes sense. If you look at it in the short term, the answer is yes. The world economy is slowing and in many ways is shutting down. Thus, some sectors are being clobbered because demand is just not going to be there anytime soon. There is also the reality that it is likely to take some time, even when the all clear is given, for activity to ramp back up. And since we have no idea how long before the epidemic is stabilized and dealt with and how long the process of returning to normal production and demand takes, the uncertainty has to factor greatly into pricing.
But this situation is vastly different from the crash created by the financial crisis. Then, there were real economic factors that drove the downturn. The effects of a housing bubble bursting and financial system financial collapsing don’t disappear quickly. In contrast, there is every reason to believe that travel and trade can be restored in a much shorter time once the restraints to activity are removed. That is, the slowdown can be much more readily overcome. Airlines will be flying again, manufacturers will be getting their supplies again, people will be interacting again, China will reopen and optimism will return. It is just that we don’t know how long that will take. And that means the markets will have problems pricing in the value of stocks, at least if you factor in earnings just for 2020. For investors, the question is whether they are traders who are in it just for the short-term or are they investors. We don’t know the bottom but we know that economic issues created by a virus are reversible. The Great Recession was long and deep and the recovery long and slow because there was so much damage to fundamental sectors of the economy. This time is different and it is likely that the recovery will be swifter and stronger. But getting to the bottom could be a very painful process.