The second estimate of first quarter real GDP growth was revised to a negative -5.0 percent from its initial estimate of -4.8 percent, with the decline in consumer services the main culprit. It only hints at how much second quarter GDP may decline.
And today’s April personal income data from the Commerce Department confirms consumers that make up 67 percent of economic activity aren’t buying, so producers aren’t producing the services that consumers use (blue section of bar in graph). Information, retail and wholesale trade, scientific, technical and professional services are the major parts of this sector.
Americans personal income rose 10.5 percent but consumer spending fell 13.6 percent after falling 6.9 percent in March. Most of the income rise was from government support payments, as wages also fell. The rise in incomes and the drop in spending pushed the savings rate up to 33 percent in April from 12.7 in the prior month.
The high rate of savings is telling us consumers won’t begin to spend again until they feel safe.
Second quarter GDP growth will inevitably shrink much more due to 2.1 million more workers applying for unemployment benefits in the latest week, bringing the total to more than 46 million. But combined with federal layoffs the total is closer to 3 million in the latest survey. Initial claims have fallen steadily since hitting a record 6.9 million in the week ended March 28.
But Reuters reports the big surprise in the jobless claims data was a 3.7 million decline in the reported level of continuing claims in the regular state programs, which is a sign that more are returning to work. In not seasonally adjusted terms, the number of state beneficiaries fell from 22.8 million to 19.1 million in the week of May 16.
The sharp rise in unemployment has made consumers more cautious, as I’ve been saying. Retail sales fell a record 16.4 percent in April. The government checks over the past two months helped consumers pay their bills but for the economy to recover, consumer spending has to rebound.
While it is possible that the decline in continuing claims reflects individuals who left the benefit program as the economy reopened,” said Reuters, “the erratic pattern in the data for some states makes us wary of reading too much into the week to week fluctuations. (Florida’s jobless rolls fell 76% in the week of May 16, from 2.2 million to 0.5 million; California’s fell 40%, from 3.6 million to 2.1 million.) We would not extrapolate from the May 16 level.”
One economist stated that though social distancing measures are gradually being relaxed across the country, the lingering virus fear and restrained incomes “will continue to constrain consumers’ willingness and ability to spend.”
This is while experts and Federal Reserve banks such as the Atlanta Fed are predicting GDP shrinkage of as much as 40 percent in the second quarter, as consumers continue to stay close to home.
The hope will be that activity picks up again in the fall, if the federal government will show some nationwide leadership in what is after all, a nationwide pandemic.
Harlan Green © 2020
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