Friday, August 28, 2020

July income/spending shows recovery flattening. Now where does it go?

Wanted to discuss July's income and spending report that came out report. At first glance, it seems like it was pretty decent, with things still bouncing back from the major shutdowns in March and June.
Personal income increased $70.5 billion (0.4 percent) in July according to estimates released today by the Bureau of Economic Analysis (tables 3 and 5). Disposable personal income (DPI) increased $39.9 billion (0.2 percent) and personal consumption expenditures (PCE) increased $267.6 billion (1.9 percent).

Real DPI decreased 0.1 percent in July and Real PCE increased 1.6 percent (tables 5 and 7). The PCE price index increased 0.3 percent. Excluding food and energy, the PCE price index increased 0.3 percent....

The $200.6 billion increase in real PCE in July reflected an increase of $82.1 billion in spending for goods and a $121.2 billion increase in spending for services (table 7). Within goods, the leading contributor to the increase was spending for new motor vehicles, based primarily on unit sales from Ward’s Automotive Sales Report. Within services, the leading contributors to the increase were spending for health care as well as food services and accommodations.
Despite the overall increase in incomes, a lot of the stimulus measures were fading out as an income source in July. On the wages and salaries part of the income equation, the increase in July was less than in previous months, and we still have a ways to go to get back to February’s peak.

That last $485 billion in wages and salaries will likely be a lot harder to get to than the $550 billion bounce off the bottom. Because by the end of July, any COVID-related reopenings had largely happened (in fact, some places were starting to close back up as COVID resurged that month), and the $600 expanded unemployment add-ons ended. So any increases in income from here will be mostly organic and not stimulus-induced. And if it goes down from here, it'll prove that the real economy was still quite weak.

The spending side is a similar story. A nice increase of $216 billion in July (annual basis), but we are still nearly 5% below the overall levels that we had in February. What’s especially intriguing in that goods spending has actually gone up by quite a bit over those 5 months, but services spending is still significantly depressed.

And like a lot of things in America, a few fortunate/well-connected areas do really well, while the majority of us fall further behind. You can especially see that in services, where eating/drinking places, hotels, and health care isn't close to the level of business they had before COVID, even with an increase in July.

August will begin the real test of where our economy is going. We’re still well below where we were 6 months ago, and if things flatten out more, it won’t take much for the economic decline to re-start. We still have high levels of people being laid off with less government help to have them maintain spending and incomes.

I know stocks and home values are in a dangerous Bubble jumping in recent months, and maybe some people will use that as a justification to keep up their spending. But you can’t pay for bills or other expenses with stock certificates, so let’s see what happens as the COVID Summer drags to a close and schools (maybe) start back up.

The reality of where we’re going off of the new COVID-era baseline might not be recognized too much before the November election, but it’s sure going to go a long way toward determining what our economy looks like for 2021. Lots of Americans want to believe things are getting better and that things aren't much different than where they were at the start of the year. But they don't seem to recognize how far down we still are, and that there's not much in reality to keep things going from here.

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