The U.S. Consumer Is Bowed, Not Broken

Russ discusses why consumption has held up, and how the pandemic has accelerated long-term trends.

It is hard to imagine a more rapid, devastating and pervasive blow to U.S. households than the pandemic. Abruptly shutting most economic activity has led to a record high unemployment rate. In actuality, the numbers are even worse than the headline rate suggests given a record drop in labor force participation and rise in the number of furloughed employees.

But while the labor market will take years to fully heal, households are demonstrating surprising resiliency. Auto sales rebounded sharply in May and there are other signs of households emerging from their induced hibernation. Here are three reasons why the U.S. consumer remains bowed but not broken.

1. Stimulus is at least temporarily supporting income.

After plunging in March, real personal income surged in April, up nearly 14% year-over-year, on the back of multiple stimulus packages. While this is temporary – transfer payments in April rose 97% versus a year-ago – fiscal stimulus is having the intended impact: cushioning the blow to households (see Chart 1).

2. Wealth is elevated, debt modest and servicing costs low.

Unlike the prelude to the financial crisis, consumers entered the pandemic in solid shape. Household wealth stood at a record $118 billion at the end of 2019. While wealth clearly dropped in the first quarter, the rapidity of the equity market rebound has limited the damage. At the same time, consumer debt is low and falling. Personal debt is below 100% of disposable income, the lowest since the early 2000s. Not only are debt levels manageable but given near zero interest rates the cost of servicing debt is the lowest since at least 1980.