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Personal savings are up while consumer confidence is down. Americans are undoubtedly retrenching in the face of this pandemic. But the Fed remains committed to doing “whatever it takes” to help shore up the economy.

May 04, 2020
Bracing for record net job loss

Although unemployment claims continued to slowly decline, they remain at heightened levels. Claims for the week ending April 25 totaled roughly 3.8 million. Though down from a peak of 6.9 million in late March, 3.8 million still represents more than 5 times the pre-coronavirus peak of 695,000 in October 1982. The six-week total since mid-March now sits at roughly 30.3 million, or 20% of peak employment in February. That sets up a record net job loss when April’s data gets released this week, likely in the 20-30 million range. A figure that large would formally eliminate all jobs created during the current expansion and greatly eclipse the previous monthly record loss of roughly 2 million set in September 1945 at the end of World War II. 

With mounting job losses, consumer confidence suffered its largest monthly decline in April, falling to its lowest level since April 2014

Consumer confidence remains above the lows reached in each of the previous five recessions and further deterioration seems likely. But even though consumers are bracing themselves for further job losses and dim income prospects, the expectations component of the index increased, hinting that consumers foresee better times ahead. The prospect of reopening the economy is likely lifting spirits, though reopening presents other challenges and risks.

Consumers turn defensive as mood sours

Consumers turned defensive in March as their mood soured. Real consumer spending (net of inflation) declined by 7.5% month-over-month in March, the largest monthly drop on record. Discretionary spending, particularly for goods and services that are deemed infeasible by social distancing, drove much of the decline. Services spending declined by 9.5% month-over-month. Because widespread lockdowns occurred only mid-month and data shows evidence of panic buying, consumer spending looks set for worse declines ahead. 

Personal savings rate jumps as consumer spending declines

Correspondingly, the personal savings rate shot up in March to 13.1%, the highest level since November 1981. The personal savings rate typically increases during and after recessions as consumers turn fearful about job and income prospects, storing away savings for future periods of potential trouble. The savings rate was already trending upward since reaching its historic low of 2.2% in July 2005, driven by both an aging society and increased savings among high-income households. Higher savings rates mean lower consumer spending, which could hamper economic growth – the famed paradox of thrift. 

Fed maintains commitment to “whatever it takes” policy stance amidst ongoing weakness

After meeting last week, the Fed announced it would continue to use all tools as its disposal until it feels confident that the economy has weathered recent events. The Fed committed to holding short-term rates steady near zero and use asset purchases to help reduce longer-term rates. Over the last two months the Fed’s balance sheet jump from roughly $4.3 trillion in early March to roughly $6.6 trillion at the end of April. Ongoing purchases could propel the Fed’s balance sheet toward $10 trillion, which would more than double the previous peak of roughly $4.5 trillion set during the last expansion.