Category: COVID financial behavior

Background

The Bureau of Economic Analysis data released on Friday shows that the personal savings rate tripled to 33%, an historic high.  This follows March’s jump from 8% to 13%.  If these are hard economic times, what in the world is going on?   How is it that COVID triples the savings rate?

Findings

• While employee compensation tanked, stimulus payments more than compensated: While compensation fell 8%, a huge slug of federal stimulus payments and incremental unemployment compensation actually raised personal income overall by 11% in April.
• The floor fell out of spending:  Personal spending was down 14% in April, and 20% over March and April combined.  Higher income, lower spending = COVID triples the savings rate vs. March…and quadruples it vs. February..
• No one wants to see a doctor:  The single largest spending drop is health care.  People either can’t, or won’t, see health care professionals.
• Going out has gone away:  Eating out, hotels, events, gasoline – all are down dramatically.
• Forget travel – it’s in free fall:  Airline spending is down 94%, public transportation 91%, as any conveyance you’d share was shunned by almost everyone.
• Clothes?  What clothes?  Spending is down by half.  Given reports that video call participants are dressing up only the upper half of their bodies, perhaps this makes sense.

Implications

These data show which industries are hardest hit in the depths of the lockdown, and may point to those that will have the hardest time persuading consumers to return.  When we see the May data in a month, it may show some tentative rebound in some sectors given gradual reopening of the economy. 

It’s easy to conclude that airlines are in for a rough time, but there are some more immediate consumer issues and concerns:

• Non-COVID health issues:  Scared consumers are postponing any medical attention.  This will come home to roost in declining health for many.  Hospitals and health groups are already reaching out to their patients to persuade them to come back in.
• Is it safe?  Not just dentists – but any business – will find people asking this question.  While this is obvious – it may be that critical sectors like health care will lead the way in getting consumers back in to businesses.  Medical offices and hospitals may also be able to lay claim to using the most advanced disinfection techniques. 
• Will the stimulus continue?:  The CARES act has burned through the majority of its stimulus payments by the end of April.  If it doesn’t continue paying, and states don’t pick up the slack, we’ll see a significant drop in income and another big hit to spending.

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.  All the data is reported annualized – e.g. the April numbers reported are 12x the actuals observed because the BEA always annualizes for comparison purposes.  This means that the press usually gets it wrong and reports annualized data as one month’s amount.

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Background

Is it possible that COVID-19 increased personal spending?  Not overall, but yes, in certain areas.  We know from my previous post that in March people spent 8% less overall, with the biggest hits being health care, entertainment, and eating out.  But the same Bureau of Economics data shows where spending increased.  March data is the most recent currently available.  Until we get April data (end of May), this should show the early trends – or the tip of the iceberg.  

Findings

• Eating is big:  Spending on groceries (excluding alcohol) jumped 20%, $181 billion.  Anyone who visited a supermarket in late March is aware of the rush of stocking up on foodstuffs.  
• Sin is in:  Alcohol sales were up 17%, and tobacco sales were flat.  In the first week after lockdowns started, ending 3/21, Nielsen reports alcohol sales were up 55%.  Many of us have experienced Zoom happy hours.
• Food and alcohol increase offsets eating out:  The jump in food and alcohol spend of $205 billion is almost exactly the same as the decline in food service spend – restaurants and bars – of $207 billion.
• Housing spending was flat (so far):   The cost of housing, including rental payments and utilities, was flat.  Of course March rent and mortgage payments would have been paid before the lockdowns and layoffs started.  
• Drugs up — briefly?:  Spending on prescription drugs increased in March, probably as concerned consumers stocked up on medications. Early indications are that in April and May drug spending dropped, especially doctor-administered drugs (people stopped visiting medical facilities).

Implications

The March data shows the initial spending changes.  And yes, in a couple select cases, we saw COVID-19 increased personal spending.  But is it the tip of the iceberg? Or will we see more changes?  While we don’t have the April spend data yet, we know April unemployment numbers jumped dramatically and spending is probably dropping further.

Likely food and alcohol will hold up.  Kroger, the largest US grocery chain, hired 100,000 people in the eight weeks ending mid-May, a 22% increase.   As long as people avoid restaurants, they’ll be buying for home.  

Most other categories are a big question mark.  April data, pre-reopening, should look grim for categories like restaurants and entertainment.  But reopening doesn’t mean business income returns, or that people are willing to return to public spaces.  A Seton Hall study showed that 61% of sports fans wouldn’t return to live events until there is a COVID-19 vaccine.

I’ll be reviewing the April BEA data when it releases on May 29.

The small print

The data is from the monthly Bureau of Economic Analysis’ Personal Income and Outlays report.   For housing, rentals are actuals but home owner payments are a calculation of the value of the home as a rental, not the actual mortgage payment.  

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Background

How is it possible that with the pandemic leading us into recession that we would see that COVID-19 drives up savings?  We’ve seen the personal savings rate, what people make minus what they spend, hovering around 7-8% for several years. Yet the March data just released by the Bureau of Economic Analysis shows the savings rate jumping to 13.1%.  How can this be?  

Findings

• It’s because people stopped spending:  Personal income was actually down 2%, or $382 billion, in March.  But – personal spending was down 7.5% or $1.1 trillion.   As people understood the virus risks, they stopped spending.  Less spending means more money saved. In the short term, COVID-19 drives up savings.
• The biggest drop was health care spending:   This may seem the strangest reduction.  The news is constantly talking about hospitals taking in virus patients.  Presumably people decided to avoid non-critical contact with health care professionals, including office and hospital visits.  Spending dropped over $400B or 16%.
• Fun outside the home plummeted:  Events – sports, museums, theater, and health clubs – saw a 45%/$106 B drop in spending.   Gambling was down 33%/$54B as casinos were avoided.
• Forget travel and restaurants:  We know these industries are being heavily impacted by virus worries.  Food services were down 23%/$207 B.  Accomodations, e.g. hotels, were down $68B/43%.   Air transport was down $57B/54%.
• Cars can wait:  New vehicle sales were down $87B/27% and gas spending was down $50B/16%.  Uncertainty causes people to postpone purchases, and if you’re not driving as much you don’t spend as much on gas.

Implications

First, don’t think that seeing the savings rate up with coronavirus is a positive sign.  People’s reduced spending means they were preparing for what they knew was coming.  In April, unemployment claims are way up.  Companies are reducing salaries.  If people don’t, for example go to restaurants and sporting events, that means workers in those industries end up with little or no income. In other words, March was the consumer spending crash which pointed to the industries that will be hardest hit and therefore cut staff.

April data will look worse.  Personal income will decline substantially.  During the Depression in the 30’s, the savings rate went negative as the country reached a 25% unemployment rate.  If we see a similar trend, look out.  Americans will be postponing their underfunded retirement, but may not be able to find jobs.  

I’ll be looking at the savings rate every month to understand the impact on consumers.  Financial services firms will need to be flexible and understanding of their clients.  This won’t be the time to scold people for not saving more for retirement.

The small print

The data is from the monthly Bureau of Economic Analysis’ Personal Income and Outlays report.  The health care category incudes hospital and nursing home services (down $144B), physician services (down $128B).  

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