We continue to sift through extraordinary figures from the fallout of the coronavirus shutdown. This week, the BEA reported that in April, spending decreased by 13.6% and income (mainly due to stimulus payments) increased by 10.5%, which translated to a national personal savings rate of 33%. Although that savings rate may be a financial planner’s dream, it’s a temporary dislocation that should correct as we work through reopening the economy. Other historic figures include unemployment claims. Although there were still another 2.1 million claims this week to add to the incredible total since the coronavirus spread, continuing claims decreased by 3.86 million. Markets are pricing in some of the economic bottoming activity that we are starting to see. The more economically cyclical and sensitive sectors recently started outperforming the sectors that were seen as safe havens during the shutdown.
On Friday, the U.S. Bureau of Economic Analysis released official personal income and expenditures figures for April. The highlights include a record 13.6% drop in spending as April felt the full brunt of the coronavirus shutdown. However, there was also a record 10.5% rise in incomes as federal stimulus payments from the CARES Act ($1,200 per adult and $500 per child, subject to income limitations) were distributed. This dynamic of injecting stimulus with shelter-in-place orders (and businesses shut down) led to a spike in the personal savings rate as a percentage of disposable income to 33%.
“The numbers were wild,” Gregory Daco, chief U.S. economist at Oxford Economics, said of Friday’s report. “It’s not every year you get these kinds of crazy swings. It requires a bit of coolheadedness to understand what is transitory and what is permanent.”
On the income side, the one-time recovery rebate checks from the CARES Acts are obviously transitory. There is also support from federal unemployment benefits ($600 per week) supplementing state unemployment benefits that runs through July 31st. That gives the economy at least another two months (assuming no extensions) to regain its footing and employment to rebound.
On the expense side, we are already seeing some pick up in spending activities as shelter-in-place orders are gradually being relaxed. Per credit card activity from 1010data, consumer spending appears to have been in a bottoming pattern between the end of March through mid-April, and has been rising throughout May. Certain industries are still struggling mightily such as the travel industry, but retail and restaurants & dining, which were some of the hardest hit, have had increased spending activities. And, as a positive leading indicator on consumer spending, the Michigan Index of Consumer Sentiment has had two consecutive increases in its readings.
Another crucial factor affecting consumer spending, especially in the more discretionary categories, is the job environment. There have been more than 40 million Americans that filed unemployment claims in the past 10 weeks. Although initial unemployment claims have been falling for the 8 weeks, they are still at historically high levels.
We finally received our first bit of good news on the employment front this past Thursday from the Department of Labor. While the headline weekly initial unemployment claims number was still bad at 2.1 million, continuing claims – those who have been collecting for at least two weeks – were 21.05 million, a clearer picture of how many workers are still sidelined. That number dropped sharply, falling 3.86 million from the previous week! Those numbers suggest that we may be close to a tipping point on the employment front.
Stock markets and risk assets had another good week on increased economic optimism. It was a little choppy at the end of the week due to renewed tensions with China. But, at his press conference on Friday, President Trump stopped short of imposing sanctions or tariffs. He stated that the U.S. would revoke Hong Kong’s special treatment but did not announce other measures, including any indication that the US would pull out of the phase-one trade deal the countries reached earlier in the year.
Sector rotations has been occurring for the past couple of weeks and continued in stark contrast this week. The more economically cyclical and sensitive sectors that were beaten up during the coronavirus downturn are rebounding. Technology and communication services sector stocks, which held up well and, in some cases, benefited from shelter-in-place orders, had marginal gains while financials (led by banks) and industrial sector stocks roared back. That rotation should continue if economic momentum is sustained and gains steam.
Have a great Sunday!
Timothy W. Ellis, Jr., CPA/PFS, CFP®
Senior Investment Strategist, Wealth Strategist