June 26,  2020

Personal consumption expenditures rose 8.2% in May after having plunged by 12.6% in April after having dropped by 6.6% in March.     What we are really interested in is consumption spending in real terms (i.e., after adjustment for inflation) because that is what goes into GDP (shown above).    On that basis consumption spending rose 8.1% in May after having fallen 12.2% in April and 6.4% in March. 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 economy turned around in May and consumer spending rose sharply.

Personal income fell 4.2% in May after having risen 10.8% in April.  In April the wage component declined $0.8 trillion as workers lost their jobs, but transfer payments rose by $3.0 trillion.  In May those monthly changes changed direction with wages rising $0.3 trillion while transfer payments declined by $1.1 trillion. The April increase reflected the lift to income caused by the Treasury providing $1,200 checks to virtually every taxpayer.

What that means is that real disposable income — what is left after paying taxes and adjusted for inflation —  fell 5.0% in May after having risen 13.6% in April.

And with the government shoving so much money into consumers’ hands in April the savings rate surged to 32.2% in that month, but in May the savings rate dropped back to 23.2%.  That money could not get spent in April because the economy was essentially shut down in that month.  But that money is not going to stay saved.  Consumers have all sorts of deferred purchases from mortgage and rent payments, to car loans, to credit cards.  Spending on those items is bound to surge in the months ahead and the savings rate will decline commensurately.

Think the economy is not going to recover soon?  Think again.  March and April were terrible months.  However, the economy is getting a jump-start from the fiscal stimulus (particularly from the refund checks) and spending should pick up once again in late May and certainly in June as the economy re-opens.

For what it is worth, we currently expect a decline in second quarter GDP growth of 50.0%.

However, the economy is beginning to re-open gradually.  These developments should soon bolster both consumer and business confidence.The stock market has begun a vigorous recovery and has already recovered two thirds of its earlier decline.    Meanwhile, the government has passed $2.5 trillion in fiscal stimulus, the proceeds of which are working there into the hands of businesses and consumers as this is being written.  As a result, we now anticipate third quarter GDP growth of 51.0% and 7.0% growth in the fourth quarter

Stephen Slifer


Charleston, SC