Personal income fell -2.7% in August. Still, consumer spending rose 1.0% M/M. What Gives?

The economy is still very much an employment story. While the official U3 unemployment rate fell to 7.9% from 8.4%, the underlying data was, simply put, “ugly!”

“Excess” Savings

Last week, I discussed the theory that the “excess” savings from the stimulus packages (one-time stimulus checks and the now expired supplemental $600/week in unemployment benefits) would carry the economy through Q4. No Way!

The pre-virus savings level was $1.2 trillion. The CARES Act stimulus ballooned savings to $6.40 trillion in April (everything was closed; nothing to spend it on except toilet paper, bottled water, and some frozen entrees). Then the re-openings began. In May, savings fell by -$1.9 trillion. In June, by -$1.0 trillion. Then it levelled off. July was -$0.2 trillion, August -$0.8 trillion. Personal savings stood at $2.4 trillion in August, not all that far from the pre-virus average level of $1.2 trillion. 

The fall in savings explains how consumer spending actually rose by +1.0% in August despite a fall in income (-2.7%), the impact of not receiving the supplemental $600/week in unemployment benefits. Furthermore, I see a continuing negative impact on income as significant layoffs occurred in August and September as noted in the media and the latest unemployment releases.

It is highly unlikely that savings are going to return to the pre-virus $1.2 trillion level. As pointed out last week, history shows that precautionary saving increases significantly after such employment shocks. In the current episode, there is evidence that a significant chunk of the lower wage community did not have access to enough cash to survive for 90 days. Do you think they will spend their