November 25,  2020

Personal consumption expenditures rose 0.5% in October after climbing 1.2% in both August and September.     What we are really interested in is real consumption spending which rose 0.5% in October after climbing 1.1% in September and 0.9% in August. The March and April drop-off in spending was caused by the drastic measures taken to halt the spread of the corona virus which were imposed in mid-March.  The $1,200 tax refund checks got into consumers’ hands in May and June and spending has climbed sharply since.  To put these changes in perspective the level of real consumer spending fell sharply in March and April, but its increases in the next five months have brought the level of real consumer spending back close to where it was prior to the recession.  Goods spending has already surpassed its January high, but spending on services — in particular spending on restaurants,  air travel and hotels — has not yet fully recovered.

Personal income fell 0.7% in October after having risen 0.7% in September and falling 2.5% in August. The dip in consumer income in August was entirely attributable to a reduction in weekly unemployment insurance payments.  Payments of $600 per week expired at the end of July.  They were replaced by benefits of $300 per week beginning in August.  Worker compensation, however, rose 0.7% in October after climbing 0.8% in September  and 1.4% in August as job gains boosted worker paychecks which should continue to climb in the months ahead.

What that means is that real disposable income — what is left after paying taxes and adjusted for inflation — declined 0.8% in October after having risen 0.6% in September and having fallen 3.3% in August.  The year-over-year increase is still fairly lofty at 5.0%.

With the government shoving so much money into consumers’ hands in April the savings rate surged to 33.7% in that month.  But the tax refunds could not get spent in April because the economy was essentially shut down in that month.  But that money was not going to stay saved.  In fact, the savings rate has steadily declined in the past six months but  still stands at a lofty level of 13.6%.  With the savings rate still so high, consumer spending should continue at a brisk pace in the months ahead.

Following the  31.4% drop in second quarter GDP growth,  GDP rose 33.1% in the third quarter and we now anticipate fourth quarter GDP growth of 10%.

Stephen Slifer


Charleston, SC