American consumer spending ground to a halt during the coronavirus lockdown, and that is a massive problem for the spending-addicted US economy.
April's personal consumption data showed a 13.6% drop in consumer spending, according to a Bureau of Economic Analysis report released Friday. That's equal to $1.89 trillion, and drags spending down to a level not seen since September 2014.
It was the largest month-to-month decline since the BEA began tracking the data in 1959, and worse than economists had expected. It followed a similarly steep, revised 6.9% drop in March when the lockdown began. Spending has nosedived nearly 20% since February, before the lockdown to stop the spread of Covid-19 began.
About two-thirds of America's economy runs on consumer spending, so this is yet another sign of an economy in a dire, pandemic-linked recession. Economic data could improve as states begin to reopen, but much uncertainty remains about the shape and pace of any recovery.
Saving over spending
While consumer spending plummeted, incomes and savings rates soared last month.
The government's economic relief stimulus bill, which includes expanded unemployment benefits and one-off payments to many Americans, has put more cash in people's wallets. Without the stimulus measures, incomes would have likely fallen, said TD Bank senior economist Sri Thanabalasingam.
Personal incomes jumped by 10.5%, after declining by 2.2% in March. For many, the expanded benefits are helping pay for necessities and bills, rather than fuel other purchases.
Meanwhile savings as a percentage of disposable income soared to 33% in April, up from some 13% in March.
Now that parts of the country are reopening, politicians and economists hope many employees can return to work, businesses will reopen and consumers will begin spending again. The next few months will show whether the math is as easy as that.
Economists predict it will take consumers some time to resume their normal spending habits, including discretionary expenses on items like movie tickets or restaurant meals. Given that millions of Americans have lost their jobs due to the pandemic, uncertainty on that point remains high.
The country went into lockdown in the second half of March to limit the spread of coronavirus. Businesses shut down and laid off millions of workers. As of last week, one in four American workers has filed for first-time unemployment benefits over the past ten weeks.
Experts are wondering whether the government will need to deploy more stimulus to get people spending again.
Consumer sentiment is stuck at an eight-year low and hardly improved between April and May, the University of Michigan's consumer sentiment survey showed on Friday.
'Adding to consumers' concerns about a significant expected drop in income growth, year-ahead inflation expectations rose sharply, putting extra pressure on consumers' abilities to maintain their living standards,' said Richard Curtin, chief economist of the Surveys of Consumers.
Economic pain but no inflation
America's gross domestic product, the broadest measure of economic performance, is expected to drop as much as 40% on an annualized basis between April and June, the first quarter that felt the full effects of the pandemic. That would be the worst quarter on record.
The Federal Reserve Bank of Atlanta's GDPNow model predicts a 51.2% annualized drop in the current quarter after factoring in Friday's economic data, worse than previously expected.
First quarter GDP growth was revised down to a 5% drop on Thursday.
Data for the second quarter won't be released until several weeks after the period ends. Until then, economists have to fall back on other numbers, like the personal consumption expenditure, to paint a picture.
The PCE index is the Federal Reserve's preferred measure of inflation, because it is a broader price measure than the consumer price inflation index. The PCE index fell 0.5% from March. Excluding food and energy, for which prices can change more rapidly, the index slipped 0.4%.
Friday's numbers should be reassuring to economists worried that the trillions of dollars in monetary and fiscal stimulus will lead to a spike in inflation. So far at least, it hasn't.