Domino Effect

Roll out the obligatory caveat(s).

“The full economic effects of the COVID-19 pandemic cannot be quantified in the income and outlays estimate because the impacts are generally embedded in source data and cannot be separately identified”, the BEA reminded you on Friday, while reporting personal spending and income data for June.

Spending rose a slightly better-than-expected 5.6% for the month, coming off a record jump in May catalyzed by stimulus payments and pent-up demand.

Things get dicey when you look at incomes, which fell 1.1% last month. That was more than the 0.6% drop economists expected.

Crucially, the figure (below) shows how important stimulus and transfer payments were in simulating “incomes” over the past several months.

Congress is deadlocked on the next round of relief as Democrats push for an actual solution and a comprehensive deal that addresses the myriad economic and public health crises facing the country, while Republicans appear to be angling for a temporary extension of extra federal unemployment benefits, which have already lapsed.

The GOP proposal unveiled earlier this week calls for the $600/week payments to be cut by two-thirds while states develop systems that compensate workers at 70% of their prior wage.

Read more: How About $200 And A Get Well Soon Card?

Notably, the data out Friday showed unemployment insurance payments rising in June.

Bloomberg notes that the increase “likely reflect[s] states working through backlogs of applications [and] stem[s] mainly from the federal government’s supplemental $600 in weekly jobless benefits, highlight[ing] the importance of the payments”.

Needless to say, it does not bode well that jobless claims are rising again, while Beltway brinksmanship chances a dive off the fiscal cliff.

You should take a moment to think through the chain reaction. Consider the following:

  • Transfer payments and stimulus kept “people in their homes and businesses in business” (to quote Jerome Powell) during the worst days of the crisis…
  • … which helped bolster spending as states gingerly re-opened.
  • Now, those benefits are set to lapse…
  • … just as the re-opening push is stalled by virus outbreaks.
  • The hardest-hit sectors of the economy (retail, restaurants, etc.) are among the most affected businesses in the new lockdowns…
  • … which are forcing those businesses to consider closing their doors permanently. Data suggests many are already doing just that.
  • That means job losses will become permanent…
  • … forcing more Americans onto unemployment benefits, which are set to be diminished going forward.
  • That will decrease those Americans’ capacity to spend on services…
  • … which will force still more business closures.

And around we go. Or perhaps I should say “down we go”, because at some point, the last domino will fall, and we’ll dead end in a double-dip recession — or worse.

Meanwhile, the personal savings rate (which some lawmakers have suggested is evidence that Americans don’t really need more assistance or, if they do, aren’t inclined to do their patriotic duty by spending the money Steve Mnuchin sends them) dropped a second month in June.

Obviously, the overall level is still very high historically speaking, but my guess would be the trend shown in the figure (above) will continue, given that everyone knows most Americans came into the pandemic broke.


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5 thoughts on “Domino Effect

  1. I can never seem to come up with a nice way to say this …not in the age of political correctness…. Had the Fed not taken actions it did arguably the system would have imploded…immediately if not sooner.. The actions it took were a eleventh hour to stave off the same maybe 6-8 months later… After years of unwise choices in Taxes, geopolitics , trade , race relations and whatever else (you name it) the proverbial ‘chickens are home to roost ‘…… I am probably old fashioned , a simplifier by nature but not always incorrect ….The responses to the last 3-4 months which were driven by philosophies strictly Hubris driven and outdated in the Geopolitical sense are perhaps not without predictable consequences even if not acceptable by the powers that are now entrenched…

  2. The W shape, based on QoQ data that is essentially irrelevant in this context, is fast becoming the base case. In reference to the “patriotic duty” of spending, the big question in my mind is around the increasing potential for a balance sheet recession, a la Richard Koo. We already know that the FED has become ineffectual at stimulating the real economy. But, if politicians continue this fuckery with the public and fully break the bonds of trust, the result may be that fiscal stimulus also finds itself ineffectual, in an every-man-for-themselves type of dynamic where fiscal stimulus ends up being horded into savings to the greatest extent possible.

  3. I should add that the FED being incredibly effective at inflating absurd asset bubbles actually feeds into this dynamic, creating an environment where is it impossible to get ahead or build any real wealth without hording cash, however it is obtained (including via fiscal stimulus) into savings.

  4. The case for “We are turning Japanese” for any number of years always pointed to the fact that the Japanese were savers owning their own debt and we wouldn’t. COVID has changed spending/saving. To what effect?

    Cash cards negative interest rate, spend it or lose it. Call it Patriot cash. All balances go to zero in 4 months. The idea of helicopter money has been around for years. None of the braintrust ever thought how to best do it.

    1. Central bank issued (or underwritten) digital currencies (or digital cards) are coming, perhaps with some of these types of restrictions to stimulate consumption. But they can’t do it on all cash without breaking the monetary system, and so it won’t be a solution to this problem if we find ourselves in it.

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