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%, compared to about 8% before the pandemic.
The picture looks a bit different when temporary government support is excluded, however. Saving still spiked as consumption plunged, but it had returned almost back to normal by June as spending recovered. After all, disposable personal income in August excluding all Cares Act programs was still down about 2.6% compared to February, while total consumer spending was down about 3.4%.
While a lot of attention has rightly been focused on enhanced unemployment benefits, the forgivable PPP loans and farm subsidies made a huge difference to the income of small-business owners. Excluding those government programs, “proprietors’ income” fell 29% between February and May and is still down 25% compared to before the pandemic. Taxpayer support cushioned the blow, however, such that total small-business earnings fell 18% peak-to-trough, and are now down only 6%.
Finally, take a look at the massive shift in spending that’s occurred since the pandemic. The inability to safely spend money on everything from restaurants to dentists’ visits means that consumer services spending is still 7.5% lower than before the pandemic. But the potent combination of government aid and extra cash on hand from forced savings means that consumer spending on durable goods is 12% higher than before the pandemic. (Think of all the people buying Pelotons because their gyms are closed.)
Next month’s data will be released on Oct. 30.