KEY DATA: Disposable Income: +11.4%; Consumption: +2.4%; Savings Rate: 20.5%; Prices (Over-Year): +1.5%/ Sentiment: -2.2 points; Expectations: -3.3 points; Current Conditions: -0.5 point
IN A NUTSHELL: “The checks are no longer just in the mail, they are being cashed and spent.”
WHAT IT MEANS: Let’s hear it for Uncle Sam. The government’s December stimulus checks got largely distributed in January and it led to a massive rise in household income. No surprise there as the only other time we saw an increase in disposable/spendable personal income that large was last April, when the first round of stimulus checks went out. Unfortunately, if it weren’t for the government, the rise in income would have been modest, as wage and salary increases were nothing great. That shows, again, how much the economy depends upon the federal government’s largesse. Also, as expected, households spent some, but hardly all of that money. As a consequence, the savings rate skyrocketed, to the second highest level on record. When was the highest? You guessed, last April, of course. As for inflation, the Personal Consumption Expenditure deflator, the Fed’s preferred measure, rose fairly strongly for the second consecutive month. Over the year, though, inflation remains tame, even when food and energy are excluded.
The checks may be hitting people’s bank accounts, but they are not making them very exuberant about economic conditions. The University of Michigan’s Consumer Sentiment Index declined in February. Expectations fell the most. Both the future outlook and current conditions measures are at disturbingly low levels.
IMPLICATIONS: The second round of government money is doing its job: It is bolstering spending and given how much was distributed, it is creating a cushion for future spending for some households. Without the welfare being paid out, the economy would be limping along. Instead, we could see growth in excess of 4% both this quarter, and if the next stimulus round is as big as projected, for the entire year. But we need to see wage and salary gains start accelerating. The stimulus checks create a one- or two-month surge in income, but labor income eventually has to be the key source of funds used to sustain growth. However, salaries are increasing at a pace that would only support mediocre growth. And many families are still stretched, so the jump in consumption in January will not be repeated. All this says is that to get to the end of this year, when hopefully the economy will can reopen fully, we need a large amount of government support. To those who ask, “Can we afford it”, I respond by asking “Can we afford not to spend the money?” Without the stimulus, the sluggish growth coming out of the Great Recession would probably look great. Since we really don’t know how much is enough, the real question remains: “Which mistake would you prefer making, spending too little and having a substandard economy or spending too much and possibly creating higher than desired inflation?” You can control inflation. But as we saw during the 2010s, too little stimulus leads to growth that doesn’t make many households feel very good.