The Possibility of Permanent Scarring

Chief Economist Scott Brown discusses current economic conditions.

The pandemic had a significant impact on household spending in March and April, with a sharp contraction in consumer services (basically anything where people come into close contact with each other). The relaxation of social distancing guidelines has contributed to a sharp-but-partial rebound in May and June. However, that relaxation appears to have gone too fast. COVID-19 cases are up sharply in recent weeks. Some states have moved to re-impose social distancing, but it’s unlikely that we’ll return to a full lockdown. While many of the unemployed have returned to work, most haven’t, and newly laid-off workers have continued to join the ranks of the unemployed. The need for further fiscal support is apparent.

The pandemic has had a mixed impact across the income scale. Job losses were more concentrated at the bottom of the income scale. The loss of wage income was offset by “recovery rebate” checks and deposits and by the extension of unemployment insurance benefits. Some are making more than they did working, and others have fallen through the cracks, but fiscal support has helped to shore up spending at the low end. At the other end of the income scale, job losses were more moderate. White collar workers are better able to work from home. The top 20% of income earners account for more than half of household income and more than half of consumer spending. Yet, spending fell at the high end, largely because these households couldn’t spend. Forced savings should provide fuel for the recovery from the coronavirus, but we’re not even close to being through the pandemic. For many in the middle, they too have been constrained in their ability to spending and savings have increased. Banks have reported increases in the average size of checking and savings accounts.

Retail sales rose more than expected in June, following a strong gain in May. Sales at motor vehicle dealerships in June were more than 4% higher than in February, fueled by pent-up demand (as consumers postponed purchases in March and April). The forced increase in savings and recovery rebates likely helped to fuel down payments. Families may be looking to drive somewhere for vacation this summer rather than fly, which is often a good excuse to purchase a new car. While retail sales of vehicles have more than recovered, fleet sales are expected to lag considerably. Carmakers normally sell a lot of vehicles to rental agencies and to state and local governments, but that’s restrained currently. While retail sales improved significantly in May and June, about 70% of consumer spending (prior to the pandemic) has been services. Proprietary weekly data show a decrease in retail sales in early July.