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Personal Income Surprises to +10.5% on Gov't Transfers

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Friday, May 29, 2020

As we look back on a very strong month of trading, it’s safe to say we can take that old adage “Sell in May and Go Away” and throw it in the trash. Even amid a continuing coronavirus pandemic that has now claimed 103K American lives and 360K the world over, in the month of May 2002 we see the Dow up by 700 points, the Nasdaq having gained 400 points and the S&P 500 +90.

We have not been in “normal times” for a while now, so any perennial investing advice would likely go out the window this year in any case. But the strength in the market — merely 2 months after the bottom fell out in the U.S. economy on “shelter in place” initiatives — has surprised many investors, even the bullish ones, with the expediency of the comeback in U.S. indexes.

We see some interesting things in this morning’s economic reads, starting with Personal Income (PI) for April. While analysts were expecting a possible all-time low (January 2014 posted -4.7%, the worst-ever PI headline), we instead see this blossom +10.5% from a downwardly revised -2.2% in March. The reason for this profound turnaround has to do with two things: government transfers and a record-high savings rate.

Government transfers — unemployment benefits, $1200 checks, and the like — seem to have more than made up for record-high jobless claims over the past 10 weeks, at least in the near term. What many analysts have spied as a possible obstacle to building back our labor force in full — that unemployed workers are getting paid more now than they were on the job — appears to be showing up in this data. This is especially true as we recognize many lower-level job holders were the first to be let go from their positions over the past 3 months.

As far as the savings rate, this has gone up to an all-time high to 32%. Citizens staying home, curbing spending for their households or at very least augmenting their spending behavior, have given a major boost to savings. Even with more online Amazon (AMZN - Free Report) orders, streaming services like Netflix (NFLX - Free Report) and restaurant take-out food, the in-person experience of seeing a movie at the cineplex or dining at a nice restaurant clearly has a high premium attached to it.

On the other hand, the counterweight to the Personal Income report, Consumer Spending for April, did hit an all-time low of -13.6% — beneath the -13.0% estimate and more than double the figure initially reported for March. This survey goes all the way back to 1946, and we’ve never seen spending dry up on the consumer side like we had last month.

Of course, this data begs the question: What happens when the government stimulus dries up? Congress has stalled on further measures for support (The Heroes Act earlier this month having passed the House but appears to be dying in the Senate), so what happens then? Spending will likely remain subdued, but personal incomes will likely dry up. That is, unless the reopening of the economy brings back the labor force more rapidly than many analysts predict. 

Core Inflation for April fell to its lowest level in 9 years, and down farther than analysts were expecting. Advance Trade in Goods was well lower than expectations: -$69.7 billion was well below the -$63 billion consensus estimate, and nearly $10 billion lower than the headline read we saw back in February. Wholesale inventories rose 0.4% while Retail was down 3.6%.

Mark Vickery
Senior Editor

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