HIGHLIGHTS OF THE WEEK
- Optimism on economic recovery and new fiscal stimulus measures lifted equity markets this week.
- Economic data continued to show the plunge in activity due to lockdown. Real personal spending was down 13.2% in April and close to 20% since February.
- The good news is that fiscal supports more than offset the impact of the drop in employment and other sources of income, allowing for a strong gain in disposable income and an unprecedented rise in the personal saving rate to 33%.
Spending Plunges but Fiscal Supports Boost Income
Equity investors were relatively upbeat (again) this week. Rising political tensions between China and the U.S. took the steam out of momentum as the week ended, but even so, the S&P 500 was up over 2% as of writing on Friday.
On the economic front, higher frequency and survey-based data continue to show nascent signs of recovery, while traditional, but lagged indicators demonstrate the extent of decline in activity through the peak lockdown period in April.
This story was most evident in plunging personal spending data. Real, inflation-adjusted spending fell over 13% (non-annualized) in April. On top of the 6.7% decline in March, this brings total spending down nearly 20% since February.
Encouragingly, the same plunge did not occur on the income side, where government transfers more than offset the drop in market income (Chart 1), allowing real disposable income to rise a record 13% in the month.
With the combination of a drop in spending and higher income, the personal saving rate rose to a truly extraordinary 33% (Chart 2). This is a hopeful sign that timely government income supports have done their job in setting the conditions for a healthy rebound in spending in the second half of the year.
Indeed, this has likely contributed to an improvement in consumer expectations. This week, the Conference Board reported that consumers remained negative on the current economic situation in May, but their expectations for the future moved higher. Economic optimism appears to be moving higher across major economies. In Europe, economic sentiment also improved according to a European Commission poll, led by expectations for employment.
Sticking with Europe, another hopeful sign this week was the European Commission’s announcement of an ambitious economic recovery proposal worth 750 billion euros – 5% of GDP. The proposal is split between 500 billion in grants and 250 billion in loans. Countries such as Italy, will receive significant support, which is important since it is facing high debt levels and rising borrowing costs. It remains to be seen if European countries will accept the proposal as it will require new revenues sources and must be passed with unanimous support of all 27 member states.
Next week is a big one on the economic front, with ISM data and the employment report for May. Jobless claims data continue to show a fall in new applications, but a high number of continuing claims – especially after including those who qualified under expanded benefits, suggests that May could see the unemployment rate rise from April. Fingers crossed, this should be the peak..
James Marple, Senior Economist | 416-982-2557
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