Still Up 7 Percent from March; Consumer Spending up 6 Percent in June; Both at Risk from UI Cuts

Personal income fell 1.1 percent in June, with disposable personal (after-tax) income down 1.4 percent. Labor market income rose 2.3 percent in June as workers returned to their jobs as firms reopened. Personal transfer payments fell 8.9 percent over the month as fewer workers were on unemployment and the dispersal of one-time government stimulus payments faded. Transfer payments fell 17 percent in May, but jumped 100 percent in April as the government began to distribute money to households in response to the coronavirus crisis, through both one-time stimulus payments and expanded unemployment insurance.

After-tax income fell 2.5 percent in March as the first wave of coronavirus-related job losses hit, then soared 14.7 percent in April as the government provided stimulus funds to most households and began to pay expanded unemployment insurance benefits. Even though after-tax income fell 5.1 percent in May and 1.4 percent in June, it is still up 7.2 percent from March. It is unprecedented for household income to rise during a recession.

Consumer spending rose 5.6 percent in June, following an 8.7 percent increase in May. Households are spending more as businesses reopen and stimulus payments support consumption. But spending was down 6.7 percent in March and 12.9 percent in April as business closures, state restrictions on economic activity, and job losses all caused consumers to pull back. Overall spending is now up 14.5 percent from its bottom in April, but is still down 6.9 percent from February, before the crisis.

Durable goods spending jumped 8.7 percent in June after increasing 28.9 percent in May, while nondurable goods spending rose 5.2 percent in June and 7.6 percent in May. Both durable and nondurable goods spending are above their February levels. Services spending rose 5.2 percent in June and 5.8 percent in May, but is still down 11.5 percent in June from February.

With after-tax income down and spending up, the personal saving rate fell to 19.0 percent in June from 24.2 percent in May and a record-high 33.5 percent in April. Before the pandemic, the saving rate was around 8 percent. The saving rate soared as the pandemic curtailed spending while transfer payments boosted income. The saving rate has been falling over the past couple of months as transfer payments have declined and spending has resumed, but remains extremely elevated.

The personal consumption expenditures price index rose 0.4 percent in June after a 0.1 percent increase in May. The core PCE price index (excluding volatile food and energy prices) rose 0.2 percent in June, the same monthly inflation as in May. Prices fell in March and April during the worst of the crisis, and overall and core prices in the economy are still lower than they were in February. But the immediate threat of deflation—broadly falling prices—appears to have passed. Deflation can wreak havoc on an economy as consumers put off purchases in the expectation that prices will be lower in the future.

On a year-ago basis overall PCE inflation was 0.8 percent in June, up from 0.5 percent in both April and May. Core PCE inflation was 0.9 percent on a year-ago basis in June, tied with April for the lowest core inflation since late 2010.

Adjusting for inflation, after-tax income fell 1.8 percent in June, while consumer spending rose 5.2 percent.

Consumer spending plummeted in March and April as consumers stayed at home because of the coronavirus and state restrictions; job losses also deterred purchases. But spending has bounced back in May and June. Business reopenings and federal stimulus payments have supported the rebound in consumer purchases. That rebound is now at risk, however. Congress provided an extra $600 per week in unemployment insurance for beneficiaries, but those bonus payments expire today. With millions still out of work UI benefits are expected to fall by $75 billion per month. Given that many of these households are already stretched, they are likely to cut back on their spending, putting the nascent recovery at risk.

Notable in today’s data is a huge shift in the makeup of consumer spending. Spending on durable and nondurable goods in June was above its February level, while services spending was still down significantly from February. With the pandemic households are spending more on goods and less on services. This is not terrible surprising given that many types of services spending require being in crowds (restaurants, travel, etc.). If this shift persists it has been implications for the long-run composition of U.S. economic growth.

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