• Following a 2.2% month-on-month contraction in March, personal income surged by 10.5% in April, well above market expectations for a 6.5% decline. The strength was due to the expanded unemployment insurance benefits and one-time checks from the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which showed up in government social benefits that rose a whopping 91% on the month. Unemployment insurance benefits increased by 518% to $430 billion from $70 billion in March, while other government social benefits (includes the one-time CARES act checks) rose by 491% to $3.1 trillion in April.
  • While CARES funding boosted income, personal spending plummeted, falling by 13.6% m/m in April. This was below what markets had anticipated (-12.6%). Spending in both goods and services saw unprecedented declines, dropping by 16.5% for goods, and 12.2% for services. The contraction in goods spending was broad-based with food and beverages expenditures, which was up in March, driving the decline. In terms of services, the weakness was especially concentrated in health care as well as food services and accommodation.
  • The combination of plunging spending and rising income pushed the personal saving rate to an unheard-of 33% last month.
  • PCE prices also fell in April. The overall PCE deflator declined by 0.5% for the month, accelerating from a 0.2% drop in March. An important contributor for the decline was oil prices. Energy goods and services prices dropped by 9.2% for the month, the fourth straight month it has contracted. Unlike oil, food prices spiked, rising by 2.4% in April, reflecting stronger demand in recent months. Once removing energy and food prices, the core PCE deflator also contracted, dropping by 0.4%. Services prices fell by 0.3% on the month, while goods prices declined by 0.8%.

Key Implications

  • Consumer spending came crashing down in April as state-mandated lockdowns were in full effect through most of the country. April is likely to be the worst hit month, but the pace of recovery is still highly uncertain. On the one hand, the rapid dispersion of income supports should support a rebound in spending – and indeed there is already evidence of this in high-frequency indicators and the earnings of major retailers. On the other hand, without a return to positive job growth or another injection of income, this is unlikely to be sustained. Households may once again face strains to their finances when unemployment benefits expire at the end of July.
  • Indeed, income would have fallen considerably if not for the one-time checks and expanded unemployment benefits provided by the CARES Act. Back of the envelope calculations suggest income would have been 13% lower, and declined by 4% in April.
  • It will take time for the labor market to get back to pre-COVID-19 levels. While state economies are opening up and businesses are resuming operations, most will not be able to function at full capacity due to ongoing social distancing protocols. Moreover, elevated uncertainty about the coronavirus is likely to leave businesses cautious in rehiring, suggesting that it will take a considerable amount of time to restore the 25 million jobs lost over the past two months.


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