Consumer Sentiment Tanks While Personal Income Survives

Economic Report Monitor #3
March 27th, 2020

A quiet Friday closes out another tumultuous week in global markets with personal income and outlays for the month of February and consumer sentiment. Personal income came in at 0.6%, the same as January, once again dodging and effects from COVID-19. Personal expenditure was slightly muted at 0.2% but not abnormal. Services continued to be the strong underlying sector of the economy with service consumption up 0.4% while good consumption was down -0.3%. For 2019 Q4, goods consumption increased 0.6% while service consumption was up 2.4%. Price indexes stalled at 1.8% annual growth after a 0.2% uptick in January. Like consumption data, services continued to heat up at 2.5% while goods were only up 0.2%. It's likely goods saw some initial sluggishness because of the globalization of those industries. Services will see a large hit in March. Overall, the headline data in the personal income report was mostly unimportant given the noise about the US passing China in COVID-19 cases.

From MarketWatch

University of Michigan's Consumer Sentiment Survey is a more current measure and did show some initial impacts of the country shutting down. The reading for March dropped 11.9 points to 89.1, the fourth largest one-month decline in almost 50 years. The largest decline was in 2008 and two other larger declines occurred in the 1980 recession and during Hurricane Katrina. Given that three out of the four largest declines are in response to a sudden shock, one can see how injecting large amounts of uncertainty can impact consumers so heavily. The index of expectations saw a steeper drop of 13.5% as consumers realize this won't end swiftly. Richard Curtin, Survey of Consumers chief economist, points out that the drops as a result of the Gulf War and Hurricane Katrina were quickly reversed. It's likely that this one will be around longer and perhaps worsen. Emergency economic policies can only do so much.

Chief economist Curtin posted an additional note on March 20th addressing the concern that consumers are panicking. The spectacle seen in supermarkets of disappearing toilet paper and dwindling cleaning supplies is more a panic of health concerns than economic circumstances. Indeed, those same supermarkets are likely to be restocked within the next week as the panicking dies down. Nevertheless, Curtin asserts that the panic will very quickly become an economic problem as personal consumption disappears amidst lockdown policies. As he continues, he suggests a recession "is likely to reduce consumer spending for a period that is two to three times as long as the virus crisis." Finally, he supports a large aid package (that has recently passed) to bring cash to consumers so that they can avoid panic and spend. Since US GDP has been heavily reliant on consumer spending, any fluctuation in that category will drive the growth in the near term.