Can U.S. Consumers Cope Without More Fiscal Aid?
Apart from war-time rebuilding, America’s fiscal response to the pandemic was unparalleled, and explains the perky recovery even in the face of renewed restrictions. With households driving the economy, this note focuses on the fiscal impact on personal income and spending—how much the support measures have helped, and how much it will hurt when they expire. We also discuss post-election prospects for more stimulus.
According to the Congressional Budget Office, the four pandemic relief bills passed so far lifted the budget deficit by $2.3 trillion in fiscal 2020 and by $0.6 trillion in 2021 (Table 1). Without this support, the CBO estimates that U.S. GDP would have been 4.7% lower in 2020. In other words, the economy would have contracted by more than 8% this year instead of 3.5%, our current tally. Together with forgivable loans to companies via the Paycheck Protection Program (funded at $660 billion), which indirectly helped workers, much of the fiscal aid was in the form of direct payments to households. This included $1,200 in recovery rebate cheques to most taxpayers (and $500 to children), and an expansion, extension and supplementation of UI benefits.
The rebate cheques, which were distributed mostly in April, added around $270 billion to 2020 personal income, or 1.4%. The extra UI benefits included a $600 weekly federal top-up to regular state benefits (Federal Pandemic Unemployment Compensation), an expansion of benefits to the self-employed and contract workers (Pandemic Unemployment Assistance or PUA), and a 13-week extension of regular state benefits (Pandemic Emergency Unemployment Compensation or PEUC). Between April and September, the extra UI benefits added more than $360 billion to 2020 income, or 1.8%.
The CBO figures that 1.1 ppts of the 4.7% fiscal lift to GDP this year stemmed from the extra UI support, 0.8 ppts came from the Paycheck Protection Program (mostly by limiting business insolvencies and permanent layoffs), and 0.6 ppts was from the rebate cheques. Increased federal funding for state and local governments, to help cover the costs of combatting the pandemic and minimize job layoffs owing to balanced budget requirements, added 0.5 ppts of support. All remaining spending and revenue provisions added 1.7 ppts, and many indirectly supported workers and households. According to the IMF, the U.S. government ranked second among major economies (after Canada) in providing direct pandemic relief.
The $600 federal U.I. top-up expired on July 31 and the payout was halved to $300 per week via executive action with funding provided by FEMA’s Disaster Relief Fund. This contributed to a 2.5% drop in personal income in August. Because of the earlier boost in government transfer payments to individuals, income was still 3.5% higher in September than in February. That’s despite the labour market recovering just 52% of the earlier 22 million job losses. While worker compensation fell 2.6% between February and September, transfers to individuals jumped 29%. In dollar terms, the increase in transfers was three times greater than the decrease in compensation (Chart 1).
A wide gap between higher income and softer spending—with nominal consumption still down 2% since February after plunging 19% in the spring—has sent household saving skyward (Chart 2). Though more than halving since peaking above 33% in April, the 14.3% personal saving rate in September is still about double the pre-pandemic norm. Compared to the flow of saving in February, an extra $1.2 trillion (or more than 6% of GDP) has piled up for households and this figure will continue to rise in the near term, albeit at an ebbing clip. Boosted by still-elevated transfer payments and rebounding small business income, personal income continues to flow faster than outlays, as spending on services remains constrained.
Importantly, it isn't just tax rebates and extra UI payments that have countered the collapse in worker earnings and padded personal saving. As the Fed cut policy rates to near zero and began buying large amounts of debt securities, 30-year mortgage rates tumbled below 3% for the first time and continue to hover near record lows. This caused mortgage refinancing to surge. The Mortgage Bankers Association’s index hit its highest level in nearly 12 years in March and has stayed elevated (Chart 3).
For many homeowners, refinancing is freeing up cash flow that would otherwise be devoted to loan payments and, for others, it is generating lump-sum cash payments. Total cash-out volume was just under $60 billion in Q3, the most in over 13 years (Chart 4). To put this in perspective, at about an annualized $240 billion, cash-out volume represents more than three-quarters of the current $312 billion shortfall in employee compensation from its pre-pandemic peak.
However, only homeowners benefit from the refinancing lift to income. Renters incurred much of the loss in compensation, though they are currently protected against eviction under federal, state or local laws until year-end. Many homeowners are taking advantage of the CARES Act’s forbearance program, which also expires at year-end.
Still, it should be noted that the average credit (FICO) score has increased as income-support programs allowed borrowers to stay current on payments, and forbearance measures (also including the CARES Act’s program for student loans) did not tarnish credit ratings. Credit card debt also dropped sharply, as this is where some rebate cheques were put to work. According to the New York Fed, households used a third (35%) of the rebates to reduce debt, while 29% was spent and 36% was saved.
Turning to what this means for consumer spending, note that, despite a 2.5% decline in personal income in August owing to the $300 reduction in weekly supplemental UI payments, spending actually rose 1.0% that month. The saving flow absorbed the hit to income, and still ran above its pre-pandemic pace. Funding for the $300 supplemental payment ran out in October, likely resulting in a modest decline in personal income. However, consumer spending still looks to have risen last month. Of course, it helps that steady job growth has cut the ranks of those collecting some form of UI benefits (20 million in late October versus 28 million in late July).
Importantly, excess saving is primed to also absorb the December 26 expiry of the PUA and PEUC programs. As of October 31, some 13 million persons relied on these programs (Chart 5). Assuming the number of recipients falls to about 12 million at year-end, it should result in a smaller drag on personal income (of less than $200 billion annualized) than the hit caused by either of the two top-up reductions.
While excess saving affords a thick cushion of support against expiring government transfers, this is cold comfort for the millions of households with little or no savings who are about to exhaust UI benefits. Many worked in industries hammered by the pandemic. Moreover, the expiry of eviction moratoriums, along with mortgage and student loan forbearance, will likely lead to higher defaults, magnifying the hit to spending. Some extension of these programs is likely needed to avoid putting the recovery on a rocky footing now that the pandemic has caught a second wind.
The seven-day average of new COVID-19 infections has topped 165,000 as of November 19, causing more state and local governments to renew restrictions on business activity, albeit in a targeted fashion. If there is no return to widespread lockdowns, the fact that businesses are more accustomed to operating under COVID protocols and that the weakest firms have already succumbed to the first wave suggests a less negative impact on the economy this time around. And, even business confidence should prove more resilient with major progress being made towards an effective, safe and widely-distributed vaccine.
Nevertheless, a re-opened and extra-funded Paycheck Protection Program (PPP) will likely be required to keep the potential second wave of job layoffs and business closures to a minimum. Many businesses are still facing a sharp decline in sales, and previous PPP loan proceeds have already been used to pay wages and other costs to fulfill forgiveness requirements. The PPP closed on August 8 after backing 5.2 million loans worth $525 billion, and the undisbursed $134 billion of funds went back into Treasury’s coffers.
More direct federal support for state and local governments is also needed to keep schools open (critical to keeping people in the labour force) and to cover higher healthcare expenses at a time when financial resources are depleted by the first wave—and major cutbacks are required to balance budgets. For states, the Wall Street Journal calls this the “biggest cash crisis since the Great Depression”. There have already been bipartisan appeals for $500 billion from the National Governors Association and $250 billion from The United States Conference of Mayors.
While direct income support for households was a key feature of the first wave’s relief bills, we judge indirect support via measures designed to further assist small businesses and municipal governments will likely be key measures in the second wave’s relief package. Assuming Congress remains divided after the January 5 run-offs in two senate seats in Georgia, our working assumption is a stimulus deal worth up to $1.0 trillion, or about 5% of GDP. If the Democrats end up controlling the Senate, we could easily see double this figure.
Bottom Line: Expected further fiscal aid underpins our outlook for 4% GDP growth in 2021, assuming the second wave doesn't trigger a tsunami of restrictions. Consumer spending will still downshift in coming months, as a new fiscal deal could be seriously delayed. However, the slowing will stem more from waning pent-up demand and lingering virus anxiety than from the end of income-support programs. Past relief measures have effectively boosted aggregate saving, giving consumers some backbone. This means that even if Congress remains gridlocked and no further relief bill is passed, the recovery will be dented but likely not derailed.