Consumption to keep rising regardless of fiscal delay - Capital Economics
US Economics

Consumption to keep rising regardless of fiscal delay

US Economics Update
Written by Michael Pearce
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Even though Congress failed to prevent the $600 additional UI payments from expiring last Friday, we still expect a deal in the coming weeks which will offset the continued hit to incomes from the pandemic. With the saving rate so elevated, the bigger driver of consumption over the coming months is the path of the virus itself, with the latest signs providing some encouragement that the recovery remains intact.

  • Even though Congress failed to prevent the $600 additional UI payments from expiring last Friday, we still expect a deal in the coming weeks which will offset the continued hit to incomes from the pandemic. With the saving rate so elevated, the bigger driver of consumption over the coming months is the path of the virus itself, with the latest signs providing some encouragement that the recovery remains intact.
  • Last week’s deadline failed to spur a last-minute deal in Congress, with negotiators apparently still far away from a bipartisan bill. That is clearly bad news for the millions of Americans dependent on those payments, but we don’t think it will be enough to derail the economic recovery. In a sign of how generous fiscal support has been so far, personal incomes in June were almost $1trn higher than in February. (See Chart 1.) Allowing the $600 payments to lapse means incomes have fallen close to pre-pandemic levels. With both sides agreeing on the need for more spending, it still seems likely the impasse will be temporary. A compromise package which includes a partial extension of the UI payments, together with another round of stimulus cheques would be enough to keep personal incomes comfortably above pre-pandemic levels.
  • Regardless of the fiscal package, arguably the bigger factor for the outlook is personal saving, which was still $2trn annualised above February levels in June. (See Chart 2.) Some of that saving probably reflects increased uncertainty over future incomes, which the fiscal package delay will have contributed to. But the consumption data suggest virus fears are the biggest brake on activity, with consumption of a range of activities that require close physical proximity still depressed. (See Chart 3.) That shows up clearest in transport (air travel, public transport) & recreation services (which includes sports & other live events) consumption. By contrast, consumers have been happy to boost spending in other areas, with goods consumption now well above pre-pandemic levels.
  • The encouraging news on that front is that the resurgence in new cases across the West and South now appears to be coming under control, with new cases declining over the past few weeks. In turn, some of the high-frequency measures we track have begun to edge higher again including the OpenTable restaurant diner numbers. (See Chart 4.) That supports our view that, assuming future outbreaks can be controlled, consumption looks set to grind gradually higher over the rest of this year.

Chart 1: Chg. Personal Income Since Feb. 20 ($trn Ann.)

Chart 2: Nominal Inc & Spend Since Feb. 20 ($ trn Ann.)

Chart 3: % Chg. in Real Consumption Since Feb. 20

Chart 4: In-Person Restaurant Diners (7dma, % y/y)

Sources: Refinitiv, BEA, OpenTable


Michael Pearce, Senior US Economist, +1 646 583 3163, michael.pearce@capitaleconomics.com