Penny-pinching consumers could spell trouble for recoveryMay 23, 2020
Attempting to make sense of this recession right now is like peering though a thick fog. To fully understand its nature, we will need to wait until full data for second-quarter gross domestic product are published in July.
But the downturn’s basic anatomy is starting to become apparent, especially in the US, where the figures appear earlier than elsewhere. In many ways, this is just a much larger version of a normal recession.
One thing that seems different this time is that much of the slump in US consumer spending has been accompanied not by declining personal incomes but by a surge in savings, which suggests consumers may remain cautious during the recovery. US national accounts always estimate real gross domestic product using three complementary methods: value added, expenditures and income flows.
Now that we are halfway through the second quarter, the most reliable way of estimating eventual output growth is to use value added indicators, such as business surveys and industrial production. The Atlanta Federal Reserve Bank’s GDP Now estimates that second-quarter GDP will fall at an annualised rate of 41.9 per cent compared to the first quarter. The New York Fed’s nowcast shows an annualised drop of 30.5 per cent. This would make it the worst quarter for GDP growth since the 1930s.
The nature, though not the scale, of the response in the labour market has been in some ways typical of previous recessions. Unemployment rates may rise by as much as 20 percentage points, according to Federal Reserve Chairman Jay Powell, and hours worked in the private sector have already declined by about 15 per cent between March and April, leaving overall productivity (output per hour worked) broadly unchanged from pre-pandemic levels.
In many recessions, the immediate decline in employment was reflected in a drop in private incomes, since the wages lost by the newly unemployed were not fully replaced by government unemployment benefits. There was therefore a squeeze on real disposable income that caused a slowdown in consumer spending, while the savings ratio changed little.
The recession of 2020 is different, at least so far. Nearly 39m Americans have lost their jobs since the pandemic began, and real disposable income did temporarily decline in the March US data. But that was partly because payments of unemployment insurance benefits were delayed by administrative bottlenecks.
For the second quarter, JPMorgan forecasts that government support from unemployment and the Cares Act, including tax cuts, will restore much of the drop in personal disposable incomeand Goldman Sachs estimates that 75 per cent of the newly unemployed will receive more in government payments than they previously earned in wages. That degree of income replacement would be an impressive step for US public policy, as Paul Krugman argues.
Despite this income support, consumer spending has collapsed, especially in service sectors and on discretionary goods such…