The bottom line is that we should feel better about the economic outlook, but not great. Via Nova’s take on the May jobs report is that the news was unequivocally good, and the report may suggest that the economic low is in place. However, the stock market rally leading up to and following the report may reflect excessive optimism on the pace and breadth of the recovery.
Normally, there is only limited and partial value in a single economic release, but the data in the April Personal Income and Outlays report clearly showed the extreme push and pull on consumer income and spending from the various government responses to Covid-19. While current conditions are exceptionally weak, we are optimistic that the economy will rebound in the second half of the year. We expect another round of fiscal stimulus in June to accompany a partial easing of economic restrictions at the state level. However, the timing and pace of growth could be significantly affected positively or negatively by several factors at the state level and in Washington.
Over 30 million people have lost their jobs so far, which has inflicted a devastating blow to personal income. Wages and salaries dropped -8.0% in April following a -3.5% decline in March. On the other side, the multi-trillion-dollar CARES stimulus package rapidly passed by Congress and the President quickly put substantial funds back into consumer pockets in the form of direct payments, enhanced unemployment benefits and other forms of assistance. Transfer payments, as these measures are classified, surged 89.6% during the month. The push and pull of these two forces had a net benefit of lifting total personal income by an impressive 10.5% for the month.
On balance then, consumer incomes were better in April, but the coronavirus impact kept consumers at home and out of most stores. The report estimated consumer expenditures fell a record -13.6%, which exacted a heavy toll on business sales.
The difference between the increase in total income and the decrease in total spending showed up as a surge in personal savings. Consumers, certainly unable and perhaps unwilling to spend in this uncertain environment, appeared to hang onto the stimulus funds lifting the savings rate to an incredible 33.0%! Part of the reason for the savings surge might be due to the timing and receipt of the stimulus as well as uncertainty over lost employment, but also to fears that the temporary extra income may be needed for future expenses. There were no additional stimulus checks sent in May, though enhanced unemployment benefits continued.
The April data vividly captured the conflicting effects of physical distancing on work and spending and the massive surge in government supplemental payments aimed at counterbalancing the lock-downs. Fear and uncertainty appeared to win out last month, according to the data.
Looking ahead, we believe the worst of the damage from the economic suppression may be, or will soon be, over, but the pace of recovery could depend on several factors. First and perhaps most important is how quickly the economic restrictions are phased out. While the process is underway in most areas, it is only gradual, making a quick snap-back to “normal” very unlikely. A second factor is how quickly businesses will rehire workers given the uncertain outlook and the new (and needed) regulations on worker safety. In addition, employee willingness to return to work could be held back by the added unemployment benefits that make staying unemployed more financially attractive near term. Add to the mix the ideas currently being debated in Washington about large subsidies or back to work bonuses as an alternative to extending enhanced unemployment benefits. An important third factor is whether there will be a rebound in new coronavirus cases that forces a return to lock-downs. Finally, now that consumers and businesses have adjusted to life under quarantine, how quickly or completely will they revert to previous habits. Many companies have announced intentions to increase work from home arrangements where possible.
We believe that the economy will rebound in the second half of the year, but it may be several more quarters before the ground lost during the suppression is fully recovered. While that is a clear negative, we also believe that both monetary and fiscal policy will remain supportive and will likely err on the side of excess particularly in a volatile election year.
The Federal Reserve is expected to keep interest rates low and credit availability high. This position will support the housing industry as well as help companies suffering from a cash flow squeeze. On the fiscal side, we look for another round of stimulus payments in June, though some fine-tuning of existing programs is likely. Program adjustments that encourage a return to work are most critical in our view. These payments will likely begin to show up in the June or July Personal Income and Outlays report for June or July as they did in April.
We are also very encouraged by the large number of Covid-19 vaccine trials already underway employing a variety of approaches. A working and widely available vaccine is crucial to finally putting this deadly virus behind us. Current estimates are that one or several may be in use by late this year or early 2021. We remain optimistic.
