The 32.9% GDP 2Q decline was hardly surprising. Many of us forecast such a decline at the outset of the quarter. There are, however, two aspects of today’s report that are surprising.
First is the 45% increase in disposal personal income. The entire increase is from the $2.5 trillion 2Q increase in government program spending – unemployment compensation, tax rebate stimulus payments, and the Payroll Protection Program. Without the income support, 2Q personal income would have fallen 24%.
If you believe that discretionary fiscal policy can have a positive impact on the lives of families and households, Congress and the Trump administration has clearly responded as needed in a time of crisis. For all the criticism that political leaders receive – much of it justified – the economic policy response to the pandemic has, thus far, been outstanding.
The second surprise is the continued personal savings increase. The 2Q savings rate was an astounding 26%. Presumably, lower- and middle-income households receiving government assistance are not saving their entire payments. So, consumers, even high-income households, have boosted saving and are very reluctant to spend. Even in June, when many of the lockdowns were lifted, the savings rate was still about 23%.
The huge increase in savings is the best measure of fear and precaution. Consumers have been broken by the pandemic experience and will likely continue their conservative spending ways well into next year.
Martin Fleming's Blog 