• Personal income advanced by 0.6% month-on-month in February, above market expectations (+0.4%). Subtracting inflation and taxes, real disposable income growth was also strong, rising by 0.4% in the month. According to the Bureau of Economic Analysis, the rise in income reflected increases in compensation of employees and farmer proprietors’ income. This included subsidy payments from the program set up by the U.S. administration to provide relief for farmers impacted by trade wars with China and other nations.
  • Unlike income, gains in spending were more measured. Personal consumption expenditure increased by 0.2% on the month, in line with market expectations, while real personal consumption came in at 0.1%. The savings rate moved up to 8.2% from 7.9% in January.
  • In terms of prices, the overall PCE deflator rose by 0.1% month-on-month. In year-over-year (y/y) terms it increased by 1.8%. Stripping out food and energy effects, the core deflator rose by 0.2% on the month, and by 1.8% y/y.

Key Implications

  • Just prior to the intensification of the COVID-19 outbreak in the U.S., consumption was rising at a decent pace, backed by strong gains in income as well as a healthy labor market. The coronavirus has turned this narrative on its head.
  • Yesterday’s jobless claims numbers were astonishing, indicating the steep toll the coronavirus is having on the labor market. Indeed, they imply a surge in unemployment in the months ahead. With stay at home orders in place across much of the country and most sports, entertainment, accommodation and food services businesses shutdown, consumption is likely to plummet during the lockdown period. Indeed, other than groceries, most other areas of spending are likely to take a hit in March and April.
  • The good news is that help is on the way. The $2 trillion funding package passed by the Senate, but still to be approved by the House, and the numerous measures taken by the Federal Reserve, will help ease financial pressures on households and businesses and spur a recovery as the virus is brought under control. In the meantime, the economy is poised to see an unprecedented decline in economic activity in the second quarter.


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