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June 18, 2020

Economic Impact of COVID-19
Income, Consumption, and the COVID-19 Pandemic
By Emily Wavering Corcoran and Sonya Ravindranath Waddell

The COVID-19 pandemic and the associated economic downturn have impacted the wallets of
many Americans. April 2020 alone was a historically extraordinary month for personal income
and spending dynamics. In April, the country
saw the largest decline in consumer spending
to date as well as the largest increase in nominal
personal income and, thus, a personal saving
rate almost double any prior high. What’s behind
those consumer spending and saving dynamics,
and what do those April numbers mean for the
broader economy?
What Happened to Consumption?
Data for April 2020 released by the Bureau of
Economic Analysis (BEA) showed real personal
consumption expenditures down 13.2 percent in
April — a $1.89 trillion nominal decrease — after
a 6.7 percent decline in March. This is by far the
largest decline in personal consumption. Prior to
March, the largest monthly decline since the BEA
began collecting the data in 1959 was around
-2.5 percent in very early 1987.
The COVID-19 pandemic has impacted consumer
spending for a variety of reasons. First, stay-athome orders restricted economic activity across

June 2020 – Richmond Fed

a number of industries as consumers could no
longer patronize restaurants and stores, travel,
or stay in hotels. Second, even without formal restrictions, some consumers have been wary to go
out to public places for fear of catching or inadvertently spreading the virus. Third, uncertainty
naturally constrains spending and the increased
unemployment and stock market volatility of the
past months have created an uncertain economic environment for households and businesses
alike. Altogether, these forces caused the number
of patrons to plummet across industries, along
with the number of dollars spent.
When we look at month-over-month consumption expenditures by type of goods and services,
the results are unsurprising, and the hardest-hit
categories were largely identified even before
the April data release. Decreases were widespread across almost all categories of goods and
services, but the largest declines were in categories such as recreation (-42.9 percent), food
services and accommodations (-34.4 percent),
and transportation (-31.9 percent). Clothing and
footwear (-28.9 percent) and health care (-28.8
percent) also saw big decreases. (See chart below.)

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Figure 1: Month-Over-Month Percent Change in Personal Consumption Expenditures (PCE) by Expenditure Category

5%
0%
-5%

1/2020

2/2020

3/2020

4/2020

-10%
-15%
-20%
-25%
-30%
-35%
-40%
-45%
-50%
Total PCE
Transporta�on

Recrea�on
Health care

Food Services & Accommoda�ons
Clothing & Footwear

Source: U.S. Bureau of Economic Ac�vity Na�onal Income and Product Accounts via Haver

In addition to the decline in personal consumption,
personal interest payments — which include all
nonmortgage interest payments — were down 6.4
percent in April. There was a 0.05 percent increase
in personal transfer payments, which include donations, fees, and fines paid to federal, state, and local
governments. But altogether, the money flowing out
of households in April was remarkably lower than
previous months.
What Happened to Personal Income?
In normal times, movements in personal income and
personal consumption are positively correlated. In
April, however, the sharp decline in personal consumption was accompanied by a sharp increase
in personal income, which jumped 10.5 percent
from March to April. Like the decrease in personal
consumption, this increase in personal income was
by far the largest change in the history of the data.
Previously, the largest personal income increase was

4.6 percent in May 2008. The May 2008 increase
was driven by transfer payments — specifically,
the 2008 economic stimulus payments that were
distributed to over 130 million individuals.
The April 2020 income increase was also driven
by transfer payments. Federal and state policy
interventions more than made up for the 7.7
percent decline in employee compensation
(including wages and salaries). Unemployment
insurance grew 518 percent, and “other” personal
current transfer receipts — including the coronavirus relief bill — grew 491 percent. In other
words, the growth in personal income is entirely
due to transfer payments from the coronavirus
relief bill, primarily unemployment insurance
payments and the $1,200 economic impact payments. Disposable personal income (personal
income minus taxes) was up 12.9 percent in April.
(See chart below.)

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Figure 2: Month-Over-Month Percent Change in Personal Disposable Income

15%
10%
5%
0%
-5%

1/2020

7/2019

1/2019

7/2018

1/2018

7/2017

1/2017

7/2016

1/2016

7/2015

1/2015

7/2014

1/2014

7/2013

1/2013

7/2012

1/2012

7/2011

1/2011

7/2010

1/2010

7/2009

1/2009

7/2008

1/2008

-10%

Source: U.S. Bureau of Economic Ac�vity Na�onal Income and Product Accounts via Haver

What Does That Mean for the Saving Rate?
The fact that consumer spending accounts for twothirds of gross domestic product means that as a
pure accounting exercise, any decline in consumption expenditures will have a notable effect on headline economic activity in the country. However, for
longer-term economic growth, investment matters,
and thus savings matters, which is why economists
and practitioners also follow the saving rate.
Personal savings is calculated by subtracting consumption costs from disposable personal income.
Thus, it is not surprising that the saving rate (savings
divided by disposable personal income) increased
considerably in April. In terms of month-over-month
change, personal savings went up 52 percent in
March and 192 percent in April. Practically, this
means the saving rate increased from 8.2 percent
in February to 12.7 percent in March to 33 percent
in April. Previously, the highest saving rate was 17.3
percent in May 1975, so this saving rate is a new
record by almost 16 percentage points. Of course, as
with many other economic realities of the last few
months, April is probably an anomaly. The COVID-19
pandemic is, first and foremost, a health crisis that
stopped much economic activity, and spending, in
its tracks. The rise in personal income was the re-

sult of government policy trying to ensure that
Americans could stay home, thus containing the
pandemic while continuing to, for example, pay
their mortgage. No one is predicting that the
saving rate will stay at this historic high, because
consumption is widely predicted to increase in
May, with perhaps a faster recovery than aggregate employee compensation.
What Happens Next?
On June 26, the BEA will release personal income
and consumer spending for the month of May.
The rebound in the retail sales report provides
some indication that consumer spending will rise
considerably and probably above expectations.
Total retail sales increased 17.7 percent in May,
including a 29 percent rise in sales at food and
beverage service establishments, a 90 percent
increase in furniture stores, and a whopping
188 percent increase in clothing stores. In fact,
the May recovery brings retail trade and food
services within 7.9 percent of the pre-pandemic
February level, which is far stronger growth than
anticipated. This does not answer the concerns
about the spread of the virus or the concerns
about the economic recovery to come, but given
the sizable fraction of consumer spending that
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is in retail sales, this report is particularly relevant to
the total personal consumption spending that we
will see in May.
The Questions We Can’t Answer (Yet)
April’s changes in personal consumption, income,
and savings were remarkable, but that one month
of data does not provide answers to the broader
questions about how household balance sheets have
changed during the pandemic, either in aggregate
or for subgroups of Americans. Assuming the spread
of COVID-19 remains contained, consumption will
increase in May and then throughout the year — but
will we see consumption return to the levels seen
prior to March 2020 across categories, or will there
be lasting changes to the amount or the way that
Americans consume? Will employment and income
bounce back, or will we see lasting economic damage from the shutdowns and continued pandemic
concerns? In addition to differing effects on industries and occupations, we know that this crisis is not
hitting Americans uniformly — what sort of a legacy
will those differing effects leave for income distribution or savings? These are questions that economists
will try to answer for months and years to come.
Emily Wavering Corcoran is a research analyst, and
Sonya Ravindranath Waddell is a vice president and
economist in the Research Department of the Federal Reserve Bank of Richmond.
This article may be photocopied or reprinted in its
entirety. Please credit the authors, source, and the
Federal Reserve Bank of Richmond and include the
italicized statement below.
Views expressed in this article are those of the authors
and not necessarily those of the Federal Reserve Bank
of Richmond or the Federal Reserve System.

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