Data Dumpster Diving

Chief Economist Scott Brown discusses current economic conditions.

With state economies opening up, activity is expected to pick up the final two months of 2Q20. Real-time indicators show improvement. However, the figures for April are consistent with a sharp contraction in 2Q20, which won’t come close to being offset by May and June.

Personal income is the main driver of consumer spending. The two trend together over time. However, the April figures were bizarre. Income rose unexpectedly, up 10.5% (+11.5% y/y). Private-sector wages and salaries plunged 8.9%, following a 4.1% decline in March (-9.9% y/y). The drop in labor income was more than offset by an 89.6% rise in transfer payments, which include “recovery rebate” checks and unemployment insurance benefits. Because Tax Day was delayed to July 15, tax payments fell 7.4%, leaving disposable income up 12.9% (up 13.4% adjusting for inflation). The Bureau of Census figures are reported at an annual rate, as if short-term effects continued for a full year, amplifying monthly quirks. Still, with spending curtailed by social distancing, savings have gone up (a 33.0% rate in April, although that is misleading). Credit card bills are generally smaller. Individual bank deposits are generally rising. In theory, savings should provide fuel for an increase in consumer spending in the second half of the year.

Scott Brown
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Personal spending plunged 13.6% in April, following a 6.9% decline in March (-17.2% y/y). The monthly-to-quarterly arithmetic can generate some strange results. If inflation-adjusted spending for May and June were to simply hold at April levels, real consumer spending (about 70% of Gross Domestic Product) would fall at a 53% annual rate in 2Q20. We are likely to see a partial rebound in the final two months of the quarter, which would limit the 2Q20 decline to about a -40% annual rate, still incredibly steep. However, improvement in May and June would also lift the 3Q20 growth figure to somewhere between +15% to +25% (annual rate). Such a rise in spending would be unprecedented, but it would still leave GDP far below where it was at the end of last year.