The Big Idea
A steady tailwind for consumer spending
Stephen Stanley | July 9, 2021
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.
Consumer spending roared back last year after the severe downturn during the lockdowns. Further strength in the first half of 2021 has brought the level of consumer outlays essentially back to where it would have been in the absence of the pandemic, even as some sectors of the economy are just getting back to normal. There should be much more to come, as households over the next few years steadily spend some of the immense savings built up during the pandemic.
Filling the income gap
Consumers lost a massive amount of income last March when Covid forced the economy to lock down, throwing close to 25 million people out of work. The Trump Administration and Congress responded with one of the most aggressive countercyclical fiscal policy initiatives ever taken with the CARES Act. In rough terms, the federal government attempted to replace the lost income with a massive round of rebate checks and beefed-up unemployment insurance as well as broadly expanding eligibility for benefits.
Personal income showed the impact. Personal income spiked with each of the three rounds of rebate checks (Exhibit 1). After March 2020, income was never lower than the trend in place before the pandemic. The area between the trend line and the actual personal income series corresponds to the excess in income throughout the period, most of which has been saved and now constitutes a roughly $3 trillion stockpile.
Exhibit 1: Personal income spiked above trend with each round of stimulus
The first round of rebate checks was arguably highly effective in replacing lost wages and salaries during the lockdowns. However, fiscal policy bogged down in the run-up to the election, as neither party wanted to hand the other a policy victory prior to the November vote. By the time that a second large Covid relief package passed in December, wage and salary income had nearly already returned to the pre-pandemic trend (Exhibit 2). The last-minute addition of a second round of rebate checks in that legislation was therefore arguably wholly unnecessary.
Exhibit 2: Wage and salary income sank with pandemic but rebounded to trend
Of course, the December package proved to be a mere down payment. President Biden and Congress passed the largest Covid relief legislation yet in March, distributing more than $400 billion in rebate check and extending supplemental $300 weekly unemployment benefit checks from March into September. By the time this final relief legislation became law, wage and salary income had fully recovered to the pre-pandemic trend and the prevailing dynamic in the labor market had become overwhelming demand for workers unmatched by supply as individuals have taken their time returning to the labor force.
Before moving on, it is worth noting that wage and salary income has moved above the pre-pandemic trend even though payroll employment is still almost 7 million below the February 2020 level. This is a testament to the sharp increase in wages being paid by desperate employers who are scrambling to staff up after their demand recovered more quickly than originally expected, as well as longer average workweeks for the workers they do have. While the wage and salary income series is far more comprehensive than the payroll count, which does not include self-employed, gig workers and others, dividing wage and salary income by the number of people estimated to be on payrolls yields a very rough proxy of how much each worker earns. That measure was up a whopping 10% in May from the February 2020 level, or about an 8% annualized clip.
In addition, keep in mind that the economy is likely to fill most of those seven million lost payroll jobs over the balance of 2021 as workers return to the workforce. As a result, wage and salary income is likely to remain on a rapid uptrend for the foreseeable future, supporting household income even as the remainder of the federal relief in the March 2021 package—mainly supplemental and expanded unemployment benefits—winds down.
Consumer spending catching up
With large service industries essentially shut down or severely restricted, consumer spending sank sharply last spring and has recovered more slowly than income. Consumer spending runs in striking parallel to wage and salary income (Exhibit 3). This should come as no surprise since spending does usually track wage and salary income pretty closely. In any case, as with labor income, spending has roughly returned to its pre-pandemic trend.
Exhibit 3: Consumer spending also sank with pandemic and rebounded to trend
As with wage and salary income, consumer spending is likely to move well above that trend line later this year and into 2022, both because labor income should be growing sharply and because households, in addition to their stream of regular income, are sitting on a massive accumulation of liquid assets, having saved most of the federal payments distributed over the last 15 months. That savings is unlikely to be spent all at once, but it will be divvied out over the next several years, offering a stiff tailwind to the consumer for as far as the eye can see.