The government’s efforts to support the U.S. economy by sending checks to taxpayers and enhancing unemployment benefits led to soaring income but most of that money was saved as American consumers pulled back on spending in April.
Personal income rose 10.5 percent in April, Commerce Department data showed Friday. Economists had forecast a six percent decline in income due to rising joblessness and a shrinking economy.
The $1.97 trillion increase in personal income is likely largely due to enhanced unemployment benefits and the coronavirus payments the U.S. Treasury issued in April. The federal government now chips in an extra $600 per week to unemployment payments, which has allowed some workers to earn more in jobless benefits than they did in wages when still on the job.
Disposable personal income, which is income after taxes, rose by $2.13 trillion.
The government payments may have prevented income from collapsing but they did not “stimulate” the economy by much. Consumer spending in the U.S. fell 13.6 percent in April, a $1.91 trillion decline. Economists had expected a 12.6 percent decrease. It may be that spending would have fallen by even more without the rise in income.
The personal saving rate surged to 33 percent, the highest ever level, as Americans set aside $6.15 trillion. Typically, this has been between seven and eight percent in recent years. The prior high, recorded in 1975, was 17.3 percent.
It’s unclear how much of the jump in saving and decline in spending was due to Americans deciding to “save for a rainy day,” fortifying their financial position for fear of losing their job or because they might have already been laid off. That is typical behavior around recessions and can actually make downturns worse as a decline in consumer spending usually means incomes decline as well, a phenomenon often referred to as the “paradox of thrift.”
In April, however, consumer spending faced another headwind: many businesses were closed. That could depress outlays not because people wanted to save more but because they lost opportunities to spend. Movie theaters, bars, and restauraants were closed across the country. People worked from home, depressing demand for fuel, auto repairs and parts, and mass transportation. Even things like buying bait for fishing or getting the family leisure boat cleaned became impossible.
A concrete example: Disney put its new animated feature, Onward, onto its streaming movie service, enabling families to watch it without spending on theater tickets.
The fall in spending is creating deflationary pressures in the economy. Inflation, as measured by the index for personal consumption expenditures, fell 0.5 percent last month. The core inflation index, which excludes food and energy, fell 0.4 percent. Over the past 12 months, the overall PCE index inched up 0.5 percent,. Core inflation grew one percent. The Fed says it targets two percent core PCE inflation.