Coverage of the economy can often be very confusing, but at the moment it is the worst I can remember. Many numbers are quoted which are very dramatic but extremely hard to understand or piece together into a consistent overall picture of what is happening. We hear that the last quarter was the worst since World War 2, yet the stock market is soaring higher. Focusing on the US, let’s look at just the key elements.
Consumer spending fell
Consumer spending has been the huge driver of the fall in the economy. The headline number is a drop of 35% which sounds very dramatic. Whilst it is large, it is important to note that the US reports annualised numbers which makes it seem even bigger. i.e. the actual fall in consumer spending during the quarter was around 9%, but the number is reported assuming a fall of 9% every quarter which takes it to a fall of 35% over the whole year. If you think this is confusing, I agree with you. To simplify, let’s look in $ terms:
- US GDP is ~$21trn per year (which is $21,000 billion)
- This is $5,250bn per quarter
- 70% is consumer spending so $3,675bn (i.e. by far the largest part)
- Consumer spending dropped by $382bn which is over 10%!
What elements of spending fell?
Spending on goods did not fall. We can see this in the recent retail sales numbers. Despite shops not being open, people have been buying as many goods as they did before, which is why this has been a good time for online retailers like Amazon and firms selling goods such as Apple.
The fall in spending came entirely from a collapse in services spending, which is twice as large a component as goods and so much more important for the economy.
Did spending fall because income fell?
This would make sense but is not in fact true. Personal income rose significantly during the quarter.
How did incomes rise during a crisis?
This is surprising but it was from the size of government benefits and transfers.
Income from pay fell by $260bn but benefits (e.g. $600 extra per week in unemployment benefits) and transfers (e.g. $1200 stimulus checks) more than made up for it. In fact, total benefits and transfers were $600bn so incomes ROSE by $340bn.
These numbers are already significant, but even they understate the amount of government support in the past few months. Another program called the Payment Protection Program, the PPP, has given out over $500bn to businesses, nominally in the form of loans but in practice they do not have to be paid back (i.e. they are grants or gifts.)
The total rise in incomes is best seen as the total of these programs i.e. $340+$510 = $850bn
If we include other effects such as lots of tax payments being deferred then the extra amount of money in the bank accounts of Americans is over $1,000bn.
Income up and spending down
We have seen an extra $1,000bn in the bank accounts of Americans. The excitement of the stock market from seeing big tech profits of $28bn in the quarter should be thought of in that context.
The fall in spending of almost $400bn cannot be blamed on a drop in income.
What happens next?
A pessimistic view is that the drop in spending on services is directly due to fear of the virus and so does not recover until the virus is under control. From comparing US states, and looking at Sweden against its neighbours, we have seen a similar drop in spending on services whether they were in lockdown or not.
An optimistic view would be that the pandemic is over and everything will go back to normal. I think it is clear this is not what is happening in the US.
Another optimistic view is that Americans will have saved $600bn this quarter and can spend it now. This is a possibility, but it is perhaps more likely that the extra savings we have seen are due to extremely poor targeting of the transfers which have gone to more affluent business owners whose spending will not be impacted. Kanye West apparently received over $2m and I am not sure this is going to drive his future spending patterns.
A more pessimistic view is that the current quarter will likely not have nearly the same amount of stimulus, so we may see a far worse outcome. In addition to changes in behaviour due to avoiding the virus we will have a large drop in income to drive spending lower.
Applied Macro 