PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Consumption, Wages and Small Business Income Drop  

By at 29 May, 2020, 1:07 am

Personal and Disposable Income Rise

by Raymond J. Keating-

On May 29, the U.S. Bureau of Economic Analysis released its personal income report for April, and the topline data require some explanation.

First, personal consumption expenditures plummeted by 13.6 percent in April, which followed on a 6.9 percent drop in March. That’s not surprising given the shutdown of large parts of the economy, and dramatic decline in employment.

Second, however, it was reported that personal income, after falling by 2.2 percent in March, jumped by 10.5 percent in April. Along with that, disposable income (personal income less personal current taxes) and real disposable income grew by 12.9 percent and 13.4 percent, respectively.

How could that be? The BEA provides the answer: “The increase in personal income in April primarily reflected an increase in government social benefits to persons as payments were made to individuals from federal economic recovery programs in response to the COVID-19 pandemic.”

So, the jump in income in April was about government aid. But we can dig inside the data some to get at what was going on otherwise, at least to a certain extent.

So, for example, it turns out that wages and salaries in the private sector declined by 4.1 percent in March and fell by 8.9 percent in April (a 12.7 percent decline overall from February to April).

In addition, proprietors’ income (with inventory valuation and capital consumption adjustments) – a major measure of small business (primarily sole proprietors and partnerships) earnings – dropped by 8.4 percent in March and declined by 12.2 percent in April (an overall decrease of 19.5 percent from February to April).

Source: Federal Bank of St. Louis, FRED

So, while the topline personal income numbers show increases in April, factor out the government payments, and workers and small businesses have suffered dearly due to the pandemic.

Finally, another point worth noting is that the increase in personal income resulting from government aid failed to translate into stemming the decline in consumption, and that’s not unusual. Whenever government in effect drops checks from helicopters, that money fails to translate into widespread consumption (as certain economists predict) because people understand that government doling out large amounts of money not only signals serious economic woes, but also that this aid will be temporary. So, they hunker down and put the money away.

Let’s not forget shoveling large amounts of money out the door via the government in an emergency aid effort will eventually have to be paid for one way or another, and those costs down the road will be significant.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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