Background
We’re in the midst of the COVID pandemic and a much-publicized economic downturn. At the same time, personal income is up since February. We’ve already seen that personal spending is down. But how can it be that incomes rise with COVID and recession sweeping the country?
Findings
- Disposable personal income was up 6% in July vs. February. This includes wages, proprietors’ (business) income, rental income, investment income, and government transfer payments. It subtracts taxes.
- Earned income dropped – but increased government transfer payments far more than compensated for the decline: Absent the increased government payments, income would be down 4% in July.
- The government stimulus was both unemployment benefits and the broadly distributed stimulus money : In April around 85-90% of all US households got the federal $1200/adult stimulus checks. Ongoing, incremental unemployment benefits have been distributed as states’ compensation programs gear up.
- Spending is down – so savings is up: With spending down 5% July vs. February, and income up 6%, the savings rate is still much higher than the historical trend. The current 18% rate is the highest it’s been since WW II.
Implications
The summary statistic is that incomes rise with COVID. Of course, every household has a different situation with what they make, if they’re hurting, and how much stimulus or unemployment compensation payments they are receiving. It’s important to remember, though, that the initial stimulus was a blanket infusion of money to households with the expectation they’d spend it either on necessities, or to buy things that would juice the economy. The reality is…not. It appears that most of the money is just sitting in savings. This shouldn’t be surprising, given that a 10% unemployment rate also means a 90% employment rate. Most households seem to be hanging on to the extra money as a buffer.
From the US economy and federal policy perspective, this isn’t a good thing. From the personal financial management perspective, this is a good thing. For once households aren’t spending a windfall money infusion, probably out of fear. This compares to many people treating income tax refunds as fun money to immediately buy something for themselves. If you are counseling clients on their finances, a great average outcome for their long-term success would be to keep spending down, stash the surplus income, and if possible keep working.
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The small print
The data is from the monthly Bureau of Economic Analysis’ Personal Income and Outlays report. Because it comes out about a month after the end of a period, we don’t know what happened in the past 30 days. The data shows that the only significant changes in government transfer payments are in the unemployment insurance line and the “other” (e.g. COVID stimulus) line, so I’ve simplified my estimate of the government impact by using February transfer payments as a baseline and then assuming any change is due to these two categories.