Broker Check

The Topsy Turvy Counter Intuitive Covid Economy

June 22, 2020
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The attached Bloomberg article offers some interesting insights into our new and somewhat crazy economic reality, at least for any of you economic nerds out there. 

https://www.morningstar.com/articles/988668/how-is-the-us-economy-handling-covid-19-so-far

One of the most interesting takeaways is this: 

Although unemployment soard to over 14%...a post Depression record…and incomes from work were down 10% (most jobs lost have been lower paying, so the percentage reduction in income is less than the percentage decline in number of jobs)…overall personal disposable income in April was actually UP 11% over January! 

That is simply a WOW statistic.  Think about that.  Despite all these disruptions, households, on average, saw money coming in the door go UP by 11% during the first full month of lock down.  How is this possible?   Well, it is generous unemployment benefits, stimulus checks, forgivable PPP loans, etc. that more than made up for the lost wages (again, this is ON AVERAGE – the economic impacts have fallen very unevenly). 

What is also interesting is that by Morningstar’s calculation, since personal disposable income was up 11%, but personal consumption was DOWN 19% in the same month, that means that the household savings rate in April was 33%.  Another WOW number (for the past decade it has fluctuated between 3 and 8%). 

It makes sense of course.  People’s incomes are up, but they still have been putting off purchases, can’t go on vacation, get haircuts, go out to eat, etc.  So people are saving out of necessity.  This is good news, because, as the writer points out, when things finally come back to normal, households may be in a much stronger financial position than is normal when coming out of a recession.  With beefed up savings and reduced debt loads, households may be able to return to normal economic activities much more quickly than in past recessions. 

This astronomically high savings rate also helps explain the resilience of the stock market during this crisis.  That personal savings rate represents a HUGE sum of money.  Trillions of dollars.  Where does it all go?  Money market funds are flush with cash, so some of it is saved in the bank.  Some people may use it to make debt payments, but a lot of it undoubtedly finds its way into the stock market, which explains in part the tremendous rally we have seen since the March panic lows.  Only makes sense, since with interest rates driven down to almost nothing it is about the only place an investor can hope to earn a positive return. 

Lets not kid ourselves, we are not done with this COVID thing yet.  We are at best in round 5 of a 15 round bout.  We have been at this for almost 4 months.  Most experts seem to be expecting we are in the end game with vaccinations in the first half of next year, so the way I see it we have another 8-12 months of the crisis left before things can get back to something like normal.  We may not be halfway through yet – but we will be there by mid summer.   Even given that we are likely to see infection rates rebound again, and see setbacks on the way, I think we get through this in better economic shape than many people expect.