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U.S. personal income shrank 2 percent sequentially in March, coming in weaker than market expectations of -1.5 percent. This was driven by a 2.8 percent fall in compensation as measures to contained COVID-19 resulted in millions of job losses. In real terms, income dropped 1.7 percent for the month.
Spending dropped significantly more than income, falling 7.5 percent in March and lower than expectations of a fall of 5 percent. Stripping price effects, personal consumption shrank 7.3 percent in March. With spending dropping more than income, the personal saving rate rose to 13.1 percent from 8 percent in February, the highest savings rate since 1980’s.
Spending on goods shrank 2.2 percent in the month, due to a 14.8 percent fall in durable goods purchases. Meanwhile, pending on non-durable goods rose 4.3 percent as consumers spent greatly on food and beverages purchased for off-premises consumption.
Consumption of services dropped 9.5 percent, driven by spending on health care, which includes physician, and dental services. Spending was down in food, accommodation and recreation services as well.
The PCE price deflator dropped 0.3 percent sequentially in March because of the fall in oil prices. Prices for energy goods and services fell 6.1 percent on the month. Stripping energy and food prices, core PCE fell 0.1 percent for the month in response to the fall in demand throughout nearly all areas of the economy.
The incoming April decline is expected to be worse as large parts of the economy were shuttered for the entire month, said TD Economics in a research report.
“As states consider plans to open up economies, it could alleviate some of the pressure on income and spending. However, the economic recovery will be gradual as social distancing measures, in some form, will likely still be in place for many months to come”, added TD Economics.