Personal Income and Consumption

We are living in strange times.  The unemployment rate rose from 3.5%  to 14.7% in April, and in November, the rate dropped to 6.7%, still far higher than a year ago.  In a typical recession, personal income would surely have fallen.  With such a spike in the unemployment rate, it would not be surprising to think that personal income would fall by 5% or even 10% or more.  But, strangely, that is not the case. Inflation adjusted personal income in October was actually up 2.6% compared to February!  So unemployment is up significantly, and personal income has risen instead of falling.
The figure below illustrates how total personal income in the United States and its composition has changed since January 2019.  The April spike in personal income came from the stimulus checks which are included in the ‘Other Transfers’ category.  The largest component of personal income, ‘Wages and Salaries,’ declined, as might be expected, and this category in October 2020 was 98.6% of the February 2020 level. Interestingly, ‘Proprietors’ Income’ was also up 8.5% in October 2020 compared to February 2020.  All income other than ‘Unemployment Insurance’ and ‘Other Transfers’ was essentially the same in October as in February.  Put differently, the increase in personal income since February 2020 is due to unemployment insurance payments and the stimulus payments.


So, how have Americans spent their income during the pandemic? The next figure indicates that personal consumption expenditures in October 2020 were lower than their February 2020 level and that savings have increased substantially. Personal consumption expenditures in October were 97.8% of their February levels, but savings were 70% higher. Back in February, savings accounted to 7.3% of personal income and in October they accounted for 12.1%.


What does this mean for the coming months? On the income side of the equation, the fact that wages and salaries and proprietors’ income have shown resilience is a good sign. Some of this resilience can be attributed to the success of the Paycheck Protection Program’s ability to channel funding to firms. On the consumption side of the equation, the increase in savings is expected, given the circumstances. Americans have fewer spending options, particularly when it comes to travel, dining out, and entertainment. In addition, some of the savings are likely precautionary.
The fact that people are now receiving vaccines for Covid-19 means that there is light at the end of this tunnel. The extra savings bode well for the economy in coming months as Americans’ consumption behaviors return to normal. The second stimulus package with additional unemployment insurance benefits, Paycheck Protection Program funds and relief checks should also ensure that personal income remains high in the coming months while the vaccine is being distributed.

Posted: December 21, 2020 by Dennis W. Jansen, Andrew J. Rettenmaier