A fiscal bridge for consumer demand

| August 14, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

In the early days of the pandemic, the CARES Act supported household incomes through tax rebate checks, an unprecedentedly generous $600 weekly addition to unemployment benefits and expanded unemployment eligibility. The idea was to bridge the interruption in income from government-imposed lockdowns. At that time, the economic impact of the virus looked like it would be brief, with the extra benefits set to expire on July 31. Personal income data through June show federal transfer more than replaced lost wages from April through June. What remains of that support after President Trump’s executive orders appears to be enough to cover pandemic-related losses in wage and salary income for now, and another fiscal package, which still seems likely at some point soon, would offer a massive boost to consumer demand late this year.

Mind the gap

When Congress negotiated the CARES Act in late March, the hope was that lockdowns would last for a matter of weeks, and that the economy might get back to a semblance of normal within a handful of months.  The relief offered to consumers came as a one-time round of rebate checks to households and bonus unemployment benefits that extended to July 31.

Personal income data through June show the federal largesse more than made up for the loss in income caused by the lockdowns.  Exhibit 1 tallies up the losses in private income.  These include both wage and salary declines, as well as falls in the income of nonincorporated businesses and financial income.  All of the monthly figures are annualized, so the raw changes are roughly one twelfth of the magnitudes reported in the tables.

Exhibit 1: Personal income – private losses

Source: BEA.

Wage and salary income dropped by roughly $1 trillion annualized, or about $80 billion a month, in April and began to gradually recover in May and June, while other private income losses amounted to around $40 billion a month in April, May, and June.  In all, the cumulative change through June relative to a February baseline was $4.4 trillion annualized, or about $367 billion on a not annualized basis.

Government largesse more than filled that gap.  Exhibit 2 shows the impact of household rebate checks and unemployment benefits on income.  Unemployment benefits built gradually in March and April but added more than $100 billion to income in May and in June (the July figure was broadly similar).  Meanwhile, household rebate checks went out mainly in April and May.  Overall, Treasury dispersed about $280 billion, not annualized, through June and another $5 billion in July.  The combination of the two added cumulatively over $7 trillion annualized, or about $594 billion not annualized, from March through June.

Exhibit 2: Personal Income – Federal Government Boost

Source: BEA.

The two programs amounted to payments that were more than $200 billion larger—about $2.5 trillion in annualized terms—than the cumulative loss of private income, leaving households in the aggregate far better off than they would have been in the absence of the pandemic, at least through June.  This helps to explain both the rapid bounceback in consumer spending, especially for goods, where social distancing constraints are not as difficult of a problem.

July update

Last month, the rebate checks slowed to a trickle—roughly $5 billion—but unemployment benefits remained just over $100 billion larger than the pre-pandemic baseline.  Meanwhile, the July payroll data suggest that wage and salary income continued to gradually claw higher, leaving the July level perhaps almost $40 billion not annualized below the February pace.  Even in the absence of another round of stimulus checks, the unemployment benefits alone were more than enough to cover the lost wage and salary income due to lingering lockdowns and persistent dislocations caused by the virus.

Looking ahead

Of course, the game changed on August 1, as the bonus unemployment benefits in the CARES Act expired at the end of July.  Without an extension, the calculus would undoubtedly have changed in an adverse way for household income.  For now, President Trump stepped in by issuing an executive order that authorizes $300 a week in bonus payments and another $100 a week from state governments that can pay them.

The average level of regular state unemployment benefits amount to between $300 and $350 a week, so the payouts through July worked out to roughly triple the norm, and a cut to $300 per week would work out to a pullback of roughly one-third.  Doing the math, unemployment benefits in August would presumably fall to around $70 billion for the month, less the decline that would result from a decrease in the number of people collecting benefits as employment continued to rise.  For the sake of argument, assume that unemployment benefits total around $50 billion to $60 billion in August.  Meanwhile, private wage and salary income was down by less than $40 billion in not annualized terms from February as of July, and the gap presumably narrowed further in August.

The cutback in the level of benefits pursuant to President Trump’s executive order will narrow the positive spread at the margin, but households are still likely to be at least on par if not better off in the aggregate than they would have been in a pre-pandemic world.

If a second CARES Act is eventually passed and it includes more generous unemployment benefits as well as a second round of rebate checks, which both parties reportedly support, then households would receive another massive rocket boost to their incomes again, even as the employment losses caused by the pandemic continue to narrow.


The personal income data through June allow for a rigorous accounting of household finances.  The details show that households ended up better off through extremely generous federal government payments than they would have been in the absence of a pandemic, and that imbalance appears to have continued in July.  Households are likely to be no worse than made whole in August, even without a second round of rebate checks and a cut in the level of bonus unemployment benefits.  While an abrupt end to unemployment benefits on August 1 would have been problematic, the current situation should be sufficient to support ongoing recovery in consumer spending, and, if Congress eventually passes another fiscal package that offers rebate checks and prolongs the current unemployment benefit formula or better, as I expect, then households will be in a position to spend heartily later this year.

john.killian@santander.us 1 (646) 776-7714

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