Consumer Spending Peaks as Income Drops
Dear Rich Lifer,
The coronavirus pandemic has put the economy on its head.
It seems like every day brings a new high or a new low when it comes to economic progress.
Our stock markets have seen record highs and record lows.
On a positive note, the economy is rebounding more quickly than many economists estimated.
However, declines in household income and increasing layoffs are threatening to slow the economic rebound that we are hoping to see.
Today we break down what you need to know about where the economy is headed…
According to the Commerce Department, personal income (ie salaries, investments and government aid) fell 2.7% in August.
This is mostly attributed to the decline in unemployment aid as lawmakers are still unable to agree on another coronavirus-relief package. Meanwhile, another 837,000 workers filed for unemployment compensation last week.
This will be the fifth straight week that unemployment numbers have held steady between 800,000 and 900,000.
In total, almost 12 million workers are receiving unemployment benefits through state programs. On a positive note, this is a decrease of about 980,000 people.
The continued layoffs show how certain industries, such as airlines and hospitality, have been unable to make solid recovery since the pandemic hit.
American Airlines Group Inc. and United Airlines Holdings Inc. told employees they will cut more than 32,000 jobs due to the inability of the government to pass new relief measures.
Additionally, Walt Disney Co. announced permanent layoffs for 28,000 theme-park workers who were previously on temporary furlough.
Layoffs occurring today reflect a shift in employers’ mentality from the beginning of the crisis. Companies that were holding on to workers are now facing the reality that revenues are weaker than they previously imagined, said Marianne Wanamaker, a labor economist at the University of Tennessee, Knoxville.
These continued layoffs combined with lack of federal aid could lead to consumer spending, the key driver of economic activity in the U.S., slowing.
Michael Gapen, chief U.S. economist at Barclays, is hopeful that households will be able to rely on savings that have been built up with aid stating, “There’s still quite a bit of saving and liquidity out there. It’s likely to support spending for another few months.”
However, we are already seeing many middle-class Americans struggling to cover their debts due to layoffs and decreased aid.
Consumer Spending Drops
Despite August declines, household income was still 2% higher than its level in February. This is mostly due to one-time federal stimulus checks, stock-market gains, and enhanced unemployment insurance payments.
These gains allowed American consumers to spend more on goods such as bicycles, cars, groceries and home improvements.
The summer saw a boost in spending, growing 9% in May, 7% in June and 2% in July. However, growth in August was only 1% showing a clear decline in consumer spending.
Much of the spending in the summer may have reflected “pent-up demand.” In other words, purchases that households had put off in the spring.
This includes visits to the dentist, home repairs and clothing purchases that could not be done in the peak of the pandemic.
Now that many households are caught up on those purchases, spending may revert to lower levels this winter.
September Labor Report
The labor market is also showing signs of recovery slowing down. Employers have been able to generate 11.4 million jobs, about half of the jobs lost due to the pandemic, since August. However, the bulk of the gains came between May and July.
The September jobs report, which was just released today, shows U.S. hiring gains slowed to 661,000 in September and marks the first month since April that net hiring was below 1 million.
The unemployment rate fell to 7.9%, which is now in line with previous recessions and remains well above levels seen before the pandemic (3.5%).
This slowdown in hiring is due to many factors. For one, the initial hiring rebound from business reopenings is easing as states lift restrictions at a slower pace than earlier in the summer.
Additionally, layoffs and the resulting claims for unemployment compensation have remained elevated compared with pre-pandemic peaks, though they are down from earlier highs.
Friday’s Labor Department report is the final jobs report before the presidential election.
Both President Trump and Democratic presidential candidate Joe Biden have promised to create millions of jobs.
The current path for the economy is uncertain.
Without a vaccine, it isn’t known how much employers can expand or cut back on layoffs.
It is also hard to predict the future of consumer spending without knowing the details of another economic stimulus bill. From March to July, unemployed workers were receiving an additional $600 of benefits every week.
This allowed them to continue spending, thus boosting the economy.
Trump recently signed an executive order to give unemployed workers an additional $300, for no more than six weeks, starting August 1.
While this is clearly better than no additional aid, it’s only half of what many Americans had expected.
Now, with income reductions that have resulted from layoffs and a decrease in aid, consumers may continue to cut their spendings which in turn will hurt business.
However, not all is doom and gloom!
Households have actually gained confidence in the recovery of the economy.
The Conference Board, a private research group, said this week its index of consumer confidence surged in September to the highest level since March.
Higher confidence makes it seem more likely that consumers will continue to spend and boost the overall economy.
Confident or not, we will have to wait and see what happens over the next month leading up to the election and going into the winter months when a risk of a second wave rises.
To a Richer Life,
The Rich Life Roadmap Team