Has the U.S. economy
reached its lowest
Americans are saving at a rate not seen since the 1950’s, presenting a challenge to an economy that runs on personal consumption. Signs show we’ve reached the lowest point and there may be a light at the end of the tunnel.
Spending data reflects fear and uncertainty
Personal spending declined by 13.6% in April, the largest decline on record. Business shutdowns, coupled with fear of contracting the coronavirus and uncertainty surrounding the path forward for the economy and employment, caused consumers to retrench significantly. This occurred despite personal income rising 10.5% due to benefits payments. Accordingly, the savings rate jumped to an astonishing 33%, easily the highest rate on record dating back to the late 1950s. This presents the paradox of thrift: increased savings reduces consumer spending, presenting a stern challenge for an economy where personal consumption constitutes 70% of GDP.
Deflation reflects lack of consumer demand
Price data from the personal consumption expenditures (PCE) index showed deflation in both the headline and core indexes in April. That confirms earlier readings from the consumer price index (CPI) and producer price index (PPI). Continued deflation likely lurks ahead due to the ongoing weakness in aggregate demand in the economy.
Consumers apparently seeing light at the end of the tunnel
Yet consumers are apparently seeing light at the end of the tunnel, hinting that the economy already passed its nadir. Both major measures of consumers’ feelings – consumer confidence and consumer sentiment – slightly increased in May. Although consumers remained dour about the current environment, their expectations toward the future turned more optimistic. This view generally agrees with higher-frequency data that shows the economic activity slowly starting to expand.
But challenges await some households
Some households could be facing greater challenges in the coming weeks. Some government programs that provided benefits to households and businesses will begin to expire this week and will proceed over the next two months without further intervention from the federal government. The mood in Washington turned more contentious, but elected officials will likely intervene at least once more to support the economy via fiscal stimulus.
Look for more signs of stabilization this week
Several indicators this week should provide greater clarity on the trajectory of the economy. The ISM manufacturing and nonmanufacturing indexes could show slight improvements in business sentiment, even if they show technical contractions. And the employment situation for May should show continued devastation in the labor market, but could actually show the worst readings for several indicators this cycle, including the unemployment rate.