Personal income for Americans fell by 4.2 percent in May, according to a report released this morning by the U.S. Census Bureau. That was a smaller decline than expected following the upward-revised 10.8 percent surge in April. Incoming earnings data have been quite noisy in recent months due to coronavirus-related disruptions. For example, average hourly compensation metrics have been inflated in part by job loss compositions, i.e. most of the separations have occurred among lower wage workers. The headline personal income figures have also been distorted by transitory factors such as the $1200 pandemic relief payments that the government sent out as well as other new transfer payments under the CARES Act. However, such emergency measures have clearly helped support consumer demand during this crisis because personal spending jumped by 8.2 percent in May, one of the largest gains on record.
Also included in this morning’s Census Bureau report was an update to the PCE deflator, which showed that household inflation pressures in America have collapsed recently. This confirms the latest CPI and PPI data from the U.S. Labor Department released earlier in June, and overall such an environment was to be expected given the severity of the economic shock that resulted from COVID-19 and related containment efforts. In fact, a Federal Reserve Bank of St. Louis model (see below) supports our earlier argument that deflation is likely a bigger risk than inflation at the moment. Falling prices for a brief period can be a positive for many consumers but one group that will probably not benefit from the timing of these latest distortions is retirees. Indeed, because of the way the annual cost of living adjustment (COLA) is calculated for Social Security recipients, older Americans will not see a bump in their benefits next year unless inflation surges back during the third quarter of 2020. Although such a pickup in inflation is possible it is highly unlikely without a more substantial recovery in consumer demand, which should prove difficult to achieve in the near-term due to nascent concerns about a “second wave” and other lingering uncertainties that may be depressing sentiment.
Sources: Econoday, U.S. DoC, U.S. DoL, FRBSL