The latest data on personal income and spending show that the U.S. economy is still gradually recovering from the coronavirus contraction. While much progress has been made since April—thanks in large part to widespread government income support that has mostly expired—there is a still a long way to go.
First, look at the difference between total disposable personal income, which includes government aid, and market income, which includes only income from work and asset ownership. (The narrower indicator is used by the NBER Business Cycle Dating Committee to determine cyclical peaks and troughs.) Before the pandemic, these two measures tracked each other almost perfectly.
Since the Cares Act, however, a large gap has opened between the two indicators, although it is now beginning to close. At the peak in April, disposable personal income was 24.5% larger than market income. The one-time Economic Impact Payments, enhanced unemployment benefits, the Paycheck Protection Program, additional farm subsidies, and the “provider relief fund” for hospitals all boosted personal incomes far above what people were making from their jobs and from their assets.
The unusual result is that disposable incomes, on average, have been higher than they were before the pandemic, although they have dropped 9% since April. Market incomes, which are a better measure of how the economy is doing, initially fell 9.5% but have since recovered by 4.5% from the bottom.
Government support has also obscured the signal coming from the average household saving rate. Initially, the saving rate spiked to 34% as disposable incomes jumped 13% and consumption collapsed by 19%. (Student loan forbearance also helped, although not by much.) The withdrawal of government aid and the rebound in consumption has brought the official saving rate back down to 14%,