If Your Income Drops, How Do You Keep Consuming?

Personal incomes fell much more than expected in October, the BEA said Wednesday.

The 0.7% drop compared to expectations for a far more pedestrian 0.1% decline, and registered near the low end of estimates from 71 economists. The range was -2% to +0.8%.

The decrease was attributable to a drop off in government social benefits. Specifically, a decline in wage assistance for workers impacted by the pandemic (see the second figure below).

Although personal spending was marginally better than consensus (printing a 0.5% gain for October versus the 0.4% the market was looking for), it nonetheless represented another month of deceleration. Revisions were mixed, but the trend in the black line (figure above) is clear.

Retail sales data for October disappointed last week, and the latest numbers on personal outlays won’t do much to change the narrative which is simply that momentum, while still perceptible, is fading. The personal savings rate was 13.6%, down from 14.6%, but still elevated.

This will probably be characterized as a “mixed” report, given that consumption held up despite the decline in incomes.

However, consumption is a kind of byproduct of income or else it’s a byproduct of debt (“byproduct” isn’t the perfect term, but it serves my purposes here). There’s no other way to obtain (i.e., consume) goods and services unless you steal them. So, I guess from a common sense perspective, we still need to ask whether it makes sense to suggest that consumption can hold up when jobless claims are running well above the pre-pandemic record high and there are still ~10 million more unemployed Americans than there were prior to the pandemic.

The latest read on jobless claims, also out Wednesday, painted a disconcerting picture. Claims rose for a second consecutive week.

That obligatory caveat aside, the consumption data alongside the durable goods report, together suggest the world’s largest economy was on reasonably solid footing at the beginning of the fourth quarter. But (and there’s always a “but”), the interim period between vaccine approval and widespread distribution could be rough, especially without a sufficient fiscal impulse.


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