Chart of the week
Lockdowns enforced due to the Covid-19 outbreak have led to significant business losses that have depressed household incomes. Between March and April, salaries fell by 11% and self-employed incomes dropped 18%. In May, renewed activity led them to turn back up.
The US government’s main measures to support household incomes were to send out cheques of up to USD 1,200 per person and significantly improve unemployment benefits. Both came in addition to the automatic stabilisers that cushion economic shocks to household incomes.
In the graph below, we estimate the amount of earned income that has been lost compared to pre-March levels. We also estimate the amount of net transfers (social benefits minus taxes and contributions) and consumption. To better estimate the level of forced saving, these amounts are taken as a percentage of average disposable income over the twelve-month period preceding the crisis.
While American households saved about 8% of their disposable income over the course of 2019, additional Covid-19 related forced saving already amounted to nearly 4% of annual income by the end of May 2020.
Our analysis
While the fall in consumption accounts for most of this forced saving, we can see that for the time being, the government’s support measures have more than compensated for the fall in earned income. Indeed, of the 2.6% increase in net transfers, 2.2% can be traced back to the various support plan measures voted by Congress. While relief cheques account for most of the increase, improved unemployment benefit is gaining ground.
With most of the relief cheques having been sent, only the improved unemployment benefit will remain, and while waiting for new measures, the question is how quickly earned income will return to normal levels. Following a 12% drop between February and April, earned income was quick to rebound 3% in May. However, if the recovery turns out to be slow, the significant pool of forced savings will cushion some of the loss.
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The opinion expressed above is dated 2nd July 2020 and is liable to change.
This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS. LAZARD FRERES GESTION – a simplified joint stock company with share capital of €14,487,500 – Paris Trade and Companies Registry No. 352 213 599. 25, RUE DE COURCELLES – 75008 PARIS, FRANCE
