U.S. personal income rises sharply in April, but personal spending contracts

U.S. personal income rose sharply by 10.5 percent in April after contracting 2.2 percent in March. Market expectations were for a decline of 6.5 percent. The strength was because of the expanded unemployment insurance benefits and one-time checks from the Coronavirus Aid, Relief, and Economic Security Act, which showed up in government social benefits that rose a whopping 91 percent on the month. Unemployment insurance benefits rose 518 percent to USD 430 billion from USD 70 billion in March, while other government social benefits rose 491 percent to USD 3.1 trillion in April.

However, personal spending dropped 13.6 percent sequentially in April, as compared with market expectations of a fall of 12.6 percent. Spending in both goods and services recorded unprecedented declines, falling 16.5 percent for goods, and 12.2 percent for services. The contraction in goods spending was widespread with food and beverages expenditures, which rose in March, driving the decline. Meanwhile, softness in services was mainly seen in health care as well as food services and accommodation.

The combination of falling spending and rising income pushed the personal saving rate to an unheard-of 33 percent last month, noted TD Economics.

Meanwhile, PCE prices also dropped in the month. The overall PCE deflator fell 0.5 percent in April, a rise from 0.2 percent fall in March. A significant contributor for the fall was oil prices. Energy goods and services prices fell 9.2 percent for the month, the fourth consecutive month of contraction. Unlike oil, food prices rose 2.4 percent in April, indicating stronger demand in recent months. The core PCE deflator also contracted in the month, falling 0.4 percent. Services prices dropped 0.3 percent on the month, while goods prices fell 0.8 percent.

“April is likely to be the worst hit month, but the pace of recovery is still highly uncertain. On the one hand, the rapid dispersion of income supports should support a rebound in spending – and indeed there is already evidence of this in high-frequency indicators and the earnings of major retailers. On the other hand, without a return to positive job growth or another injection of income, this is unlikely to be sustained. Households may once again face strains to their finances when unemployment benefits expire at the end of July”, added TD Economics.