Worst PCE Report Ever By A Mile

April PCE report was the worst PCE report ever. It gives us the details on how bad the economy would have been if the government didn’t give out extra unemployment benefits. It also shows how horrible it likely was for people who didn’t get benefits or got them a few weeks late. Finally, it tells us how bad the economy will be if the federal unemployment benefits are taken away by the end of July.

This economy would be far worse than the Great Depression if it wasn’t for government help. Even if there were no shutdowns, many people would have stayed inside which means the problem wouldn’t have been avoided. It's not being dramatic to say the economy was saved. 

If the extra benefits don’t get paid starting in August, it won’t be nearly as bad as it would have been if they never existed because it looks like people are starting to get their jobs back. It still will be terrible though. There’s also the possibility the virus spreads because of the riots and there’s a chance of a 2nd wave. America went from socially distancing to the exact opposite with all these protests. It’s an unfortunate test to see the effectiveness of the distancing.

As you can see from the chart above, median unemployed workers in many industries are getting paid more by not working than they would by working. 68% of people unemployed are making more money. People who are making less money likely had more wealth to fall back on since they were paid more. When the data point is above 100, it means they are getting paid more now.

As you can see, the workers in the lowest-paid industries are getting the largest percentage of their normal income. Usually, in recessions, the lowest-paid workers are hurt the most, but those who are getting help from the government are in the unusual spot in which they are doing better. Information technology workers are being helped the least; the good news is they have been the least affected by this recession.

Worst PCE Report Ever By A Mile

This was the worst PCE report ever and will be the worst ever. Unless COVID-19 comes back and the government doesn’t help people, I can’t imagine a worse reading than this one. Consumer spending fell 13.6% monthly which was 1% worse than expectations. Real yearly consumer spending growth fell from -13.2% to -17.3%.

The chart below shows the 2-month cumulative decline in consumer spending by industry. As you can see, recreation spending fell a 60% as you would expect since human contact has been kept to a minimum. Food and accommodations spending fell 52%. That has been a huge problem for local restaurants that don’t have the capacity to stay closed for a couple of months. 

OpenTable data shows yearly bookings growth was -81.62% on May 29th. Even though that sounds terrible, it’s actually a sharp improvement from the zero spending in April. Data is slowly bouncing back. Most economic data in May and especially June will have dramatic monthly growth even though yearly growth will be weak. That’s entirely due to comps.

3 industries experienced a 1 point increase in sales in the past 2 months as compared to February. Financial and insurance is obviously a mixed bag. Many people took their money out of investments, but many probably also focused more on insurance. Plus, the companies that make money from trading volume (exchanges) and brokerages did really well. There were record retail signups to trade stocks. 

Food and beverage sales increased. It's surprising that growth was only 1% because there was a spike in people hoarding food and drinks from supermarkets. Hoarding wasn’t as bad in April as it was in March, but this figure includes both. There was a huge spike in grocery shopping. It's unsure what is weighing this down.

Finally, housing and utilities spending rose. There has been a big spike in spending on home improvement. The housing market had a dip in March and April, but looked good in May. It might be spectacular in June just like it was before this recession. Obvioulsy, most people didn’t stop using utilities even when the economy was at its worst. That’s why utilities get high multiples from investors and are heavily regulated. They are necessities.

Income Growth Explodes

Income growth hit a record high because of all the unemployment benefits. I bet no one ever predicted record high income growth to happen in a recession. Personal income growth was 10.5% which beat estimates for a 6% decline. 5 year annualized real personal income growth net of transfer payments fell to 0.71%. 

Once more data comes out, it will no doubt hit a record low. The current low is -0.31%. Government benefits as a percentage of total personal income rose from about 17% to about 31%. It shows how important these benefits have been to people. Once the economy recovers and the extra federal benefits are eliminated, this will normalize.

As you can see from the chart below, the savings rate spiked from 12.7% to 33% which is a record high. It’s a negative that consumers felt the need to save that much, but it’s a positive that they have extra money saved up. They are also paying down debt. When this recession ends, people will emerge with less debt and more cash which will unleash the pent-up demand.

Conclusion

This was the worst PCE report ever. It indicates Q2 GDP growth will be a disaster since the U.S. economy relies on consumer spending. That’s partially why the Atlanta Fed GDP Nowcast tracker expects a 51.2% decline in growth. The good news is the economy can bounce back because consumers have paid down debt and have extra savings. 

Debt has shifted to the government which can likely handle it. Even with increased debt we have seen a stronger dollar and lower inflation. That’s the opposite of what you’d see if people were worried about America’s debt.