- Personal income fell in May, declining by 4.2% month-on-month, as the effects of one-time checks provided by the CARES Act largely wore off last month. Indeed, with most payments out the door, the dollar contribution from stimulus checks declined from $2.6 trillion (annualized) to $605 billion in May. On the other hand, unemployment benefits continued to feature prominently, boosting incomes by $980 billion, considerably larger from the levels reported in April ($180.3).
- Despite the decline in income, spending picked up in May, rising by 8.2% month-on-month, slightly below consensus expectations for 9.0%. Goods expenditure drove the pick-up, rebounding by 14.1% on the month. Spending on durable goods was especially strong, specifically that on motor vehicles and parts as well as recreational good and vehicles. Services spending also rose, increasing by 5.4% in May. The largest contributors in this category were health care, food services and accommodation. Even with the increase in May, spending still remains 11% lower than the February level.
- While spending rebounded, consumers continued to amass savings. The savings rate remained elevated at 23.2% in May, down from 32.2% in April.
- In terms of prices, the overall PCE deflator advanced by 0.1% month-on-month. Compared to a year ago, the deflator was up by 0.5% (down from 0.6% in April). Prices for energy goods and services continued to exert a large drag, declining by 1.7% for the month, and 18.5% lower than May 2019. Excluding food and energy price effects, the core PCE deflator rose by 0.1% month-on-month (1.0% year-on-year – the same as in April).
Key Implications
- Spending staged a comeback in May as states reopened their economies, unleashing pent-up consumer demand. After being deprived of non-essential goods and services in April, consumers rushed to spend on these areas last month. For example, spending on recreational goods and vehicles rose by 24% month-on-month, taking the level of spending a full 13% higher than what it was in February.
- The return of spending would not have been possible without the income support programs provided by the CARES Act. Yes, income fell in May, but that was only after an extraordinary increase in April. Moreover, more than twenty million people are receiving an additional $600 per week as part of the expanded unemployment insurance program. As a result, most households that have experienced job losses are receiving more cash from CARES Act than they would be if they were still working. This injection of income played an important role in the spending rebound last month.
- The spending outlook appears more precarious in the coming months. The expanded unemployment benefits are set to expire at the end of July, which could lead to an even greater decline in household income. If this happens, consumers will most likely reduce spending and prolong the economic downturn.
