Friday, October 30, 2020

Q3 ends well for income and spending. But the signs for Q4 aren't as good

While the GDP figures may have gotten the bigger attention of the week, Friday's income and spending report may have given a better indication of where our economy was actually at, and where it might be heading. And it was a pretty good report, as it indicated that the US economy continued to work its way out of the massive hole that it was put in for March and April, when COVID-19 first broke out.
Personal income increased $170.3 billion (0.9 percent) in September according to estimates released today by the Bureau of Economic Analysis (tables 3 and 5). Disposable personal income (DPI) increased $150.3 billion (0.9 percent) and personal consumption expenditures (PCE) increased $201.4 billion (1.4 percent). Real DPI increased 0.7 percent in September and Real PCE increased 1.2 percent (tables 5 and 7). The PCE price index increased 0.2 percent (table 9). Excluding food and energy, the PCE price index increased 0.2 percent.
A 1.4% increase in spending is really good, especially considering that August's increase was 1.0% and it seemed like things might be slowing down. Goods continued to be the driver of the recovery in spending, both durable and non-durable goods had solid gains, with good spending up 2.0% for September vs 1.1% for services (nominal basis). It continues a shift where Americans have been spending more on goods in the COVID World, as they spend more time around the house and need to make more use certain physical items. On the flip side, spending in services continues to be far below where it was in Feburary.
That's a 7.3% decline in real spending on services, and you can see that the growth was already leveling off on that side....before we started seeing record cases of COVID in October.

For incomes, more than half of the increase in income was driven by business owners (+$95.3 billion), which outpaced the increase in worker compensation (+$86.2 billion). In fact, owners of businesses (shown in green) are making more money than they did before COVID broke out. Workers? Not so much.
Also, note that while stimulus checks have been mostly been sent out at this point, we're still at a significantly elevated amount of unemployment benefits ($634 billion above Feburary's level on an annual basis). In fact, the amount of unemployment benefits went up in September, as the ending of $600-a-week add-ons for unemployment was offset by many states having the $400-a-week add-on that President Trump raided out of FEMA.

That's going to end in many states for October (Wisconsin is an exception, because we didn't start the $400-a-week add-on until a couple of weeks ago). But the ending of the higher $600-a-week unemployment benefit didn't slow down spending in September, and neither has the slowdown in job and wage growth in the last couple of months. But as COVID gets worse, a larger-than-normal number of businesses close for the season, and the Bubble of election spending pops after next week, what's going to keep things pumping along during the Holiday season?

Q3 had a nice rebound to get us back to the levels of "moderate recession" instead of "collapse". But it is going to be a much tougher road in Q4 to have us continue onto a full recovery, both economically and in general health.

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