Will A Still Elevated Personal Savings Rate Undercut The Next Virus Relief Bill?

Personal spending rose 8.2% MoM in May, Friday’s impossible-to-decipher data showed.

That’s a record, but it’s also lower than forecast. Consensus was looking for 9.3%. The range of estimates was comical.

Personal income, meanwhile, dropped 4.2%, less than the expected 6% decline. The range there was similarly wide (-11.1% to 9%).

The BEA knows this data is largely indecipherable. “The May estimate for personal income and outlays was impacted by the response to the spread of COVID-19”, a caveat reads.

“Federal economic recovery payments continued but were at a lower level than in April, and government ‘stay-at-home’ orders were partially lifted in May”, the color accompanying the release goes on to say, adding that “the full economic effects of the COVID-19 pandemic cannot be quantified in the personal income and outlays estimate for May because the impacts are generally embedded in source data and cannot be separately identified”.

The message, basically, is: “Give up, because we did”.

Nevertheless, one thing we can divine is that the distortions from April (when outlays collapsed the most on record and “incomes” surged on relief payments from Washington) partially reversed. Still, we’re nowhere near pre-COVID levels when it comes to spending.

The drop in incomes was obviously down to a decrease in federal social benefits, and the next two months are going to be crucial in that regard as Congress debates whether to extend extra unemployment assistance as part of a new virus relief package.

Compensation rebounded, with wages and salaries posting the biggest gain in more than a quarter century, but things are most assuredly not “fixed”.

The personal savings rate — which staged an unimaginable surge in April — remained elevated in May.

At 23.2%, it’s still well above anything witnessed pre-pandemic.

According to recent reports, conservatives at the White House and what The Washington Post described this week as “influential congressional Republicans” oppose the idea of sending more direct checks to Americans on deficit grounds. Some of those GOP’ers point to the savings rate to justify their opposition, arguing internally that “the checks were pocketed by Americans rather than spent in the economy”, the Post said.

That harkens back to the Ricardian equivalence debate as discussed earlier this week in “‘The Most Fundamental Problem’ For Jerome Powell: Your Savings Account“. I’ll recycle some language I employed Tuesday to make a few quick points.

It’s not economic theory (i.e., Ricardian equivalence) that’s compelling Americans to save. Clearly, the idea that Republicans would cite the personal savings rate from April in arguing against another round of disbursements is ridiculous considering states hadn’t reopened yet, which means options for spending the money on anything other than groceries and E-commerce were limited.

The data out Friday shows the savings rate falling, and expenditures rising. One way to short-circuit that trend is to oppose another relief package. That could slam the brakes on consumption and reinforce the incentive for lower-income Americans to save whatever is left from previous stimulus payments.

As I wrote in the linked post below, there’s probably granular data that lawmakers can consult when making a decision on the extension of benefits and/or another round of direct payments. One idea is simply to lower the income threshold for the next round of checks from $75,000/year (which, frankly, was probably too high) to say, $50,000/year, to ensure you’re getting money to the people who actually need it.

Of course, news that the government accidentally sent $1.4 billion in checks to dead people doesn’t help when it comes to the optics around more direct payments to households. There’s no word on whether heirs intend to return that money to Steve Mnuchin, but somehow, I’d guess the portion that was directly deposited is gone forever.

Read more: Just Send The Checks.