The Stimulus Arrives

Well at least those checks sent out to individual Americans seem to have arrived. Their impact was to jolt personal incomes in May and send the savings rate up to levels not seen for years.

The release this morning tells quite a positive story on the surface with some not so good news underneath.

Overall personal incomes rose 1.4% in May which is double the April rate and way beyond the anemic figures for the first quarter when both February and March recorded 0.3% declines. That’s the good news.

The bad news is that the ‘wages and salaries’ component of personal incomes actually fell because of a sharp drop in manufacturing wage payments: all those layoffs have shrunk the labor force receiving wages. So the only reason that May saw an increase was the government checks sent out as part of the stimulus. This is, of course, why those checks were sent out, and is a graphic example of why the stimulus was so necessary. It is also a strong rebuttal to the argument that the stimulus is not working.

Well sort of.

The problem is that people appear to have saved the cash rather than spending it. At least so far. The savings rate jumped up to 6.9%, which is a fifteen year high. Ironically while we need to develop an economy based less on debt and more on savings, we don’t want to see high savings right now. We need consumption in order to reflate the economy. We will have to see whether consumers gradually spend their cash rather than hoarding it as the data for the next few months comes in.

During the discussions about the composition of the stimulus I tried to make the point that cash payments and tax cuts are very inefficient ways of cranking up consumption: there is always a natural tendency for consumers to save rather than spend during times of rising unemployment. The best form of stimulus is direct government spending, especially on infrastructure projects like railroads where an enduring social asset and thus value is created even after the short term impact of job creation wears off. We cannot blame consumers for being sensible and saving in case of unemployment. But since we know from experience what they are likely to do we should have built the stimulus differently.

Having said that, the cash is now flowing. Let’s hope it gets spent and helps create jobs. If not then we are likely to need more stimulus later in the year, and getting that approved by a Congress already shell shocked by the rising national debt will be well nigh impossible.

So, once again, we have a report that sends a mixed message: incomes are up, but only because of the government checks.

I suppose that’s better than where we were last fall.