The US economy is a consumer spending driven economy which is fueled by consumer income. When recessions occur, as we experienced earlier this year, unemployment rises and personal income drops and along with it consumer spending.
As you can see, consumer spending is about 67.1% of the overall US economy.
When people are laid off in a recession, personal income goes down as does spending which further spirals the economy downward. This is what happened earlier this year, but it was muted by stimulus payments as well as the enhanced unemployment benefits, which fell off in August.
As you see in the chart below, which shows income and spending increases/decreases over the last year ending in October, personal income (blue line) dropped as workers were laid off, then increased due to enhanced unemployment benefits and stimulus payments. It fell again when most of the stimulus payments tailed off, then increased as unemployment started to go down. When the enhanced unemployment benefits fell off, income dropped, even though unemployment was falling because unemployment is still high.
Spending (orange line), dropped at the beginning of the recession, spiked because of additional income from enhanced unemployment benefits and stimulus payments, and has tailed off since then.
So where does spending and income go from here, and how will that impact the economy? Unemployment is still historically high, and unemployment benefits, depending on the state you live in, may have already ceased or could be close to ending. If unemployment remains high and unemployment benefits cease, we will see a cratering of personal income and spending, which would not bode well for the economy and the stock market.
I am hopeful that this will not happen, but this risk is real. Now that elections are over, there may be a willingness for Congress to stop playing politics and pass a bill extending unemployment and perhaps an additional round of stimulus payments. Also, with a few vaccines likely to soon be deployed and many more on the way, there is hope that a further healing of the economy will take place over the next year leading to more jobs and therefore more personal income and spending. This would likely fuel further economic growth and further stock market growth.
