Even as GDP tanked, personal income grew thanks to government support

While the U.S. economy contracted at the sharpest rate on record in the second quarter, people’s income increased significantly, thanks to government support during that time.

Personal income grew by 7.3% in the second quarter compared with the first, while the nation’s gross domestic product, or GDP, shrank by 32.9%, according to data by the Bureau of Economic Analysis’ (BEA). GDP is a key measure of economic health.

But as the extra $600 in weekly unemployment benefits expire this week, the trend likely won’t continue and, instead, personal incomes could plunge and drag down future GDP.

“Personal income grew primarily from two big government transfers — one was an economic impact payment, the other was the pandemic unemployment compensation,” said William Spriggs, chief economist at The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO). “Both of those compensated for a $795 billion drop in wages.”

‘People are buying things with some discretion’

Stimulus checks contributed $1.078 trillion to personal income, while the pandemic unemployment compensation — or extra $600 in jobless benefits — added $639 billion in the second quarter. This helped offset losses in wages of $795 billion, according to Spriggs.

The personal savings rate also increased to 25.7% from 9.5% in the first quarter, while disposable personal income was 42.1% in the second quarter, compared with 3.9% in the first.

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“It speaks to the broader decline we're seeing in consumption at the higher end, where people are buying things with some discretion and that's why the savings [rate] is up,” Spriggs said. “The key issue here is we can't solve that part of the consumption problem until we solve COVID, and people feel there’s certainty in their lives.”

‘Next week, many people are going to be looking at checks of $120 a week’

Because the high level of personal income is largely a result of government support from unemployment benefits and stimulus checks, the likely expiration of the additional $600 on Friday may diminish these gains, according to Spriggs.

“This is the last week people get it,” he said. “Next week, many people are going to be looking at checks of $120 a week. The only thing you can do is pay your grocery bill.”

Read more: Do you have to pay taxes on unemployment benefits?

Because personal income is vital to personal spending — which is a big factor in GDP — the expiration of the additional benefits could hurt the economic recovery, according to Spriggs.

“Unemployment compensation is the reason that people at the bottom were able to get their consumption back up, because you're compensating them in the midst of the worst labor market on record,” Spriggs said. “You have to compensate me for the permanent loss of income I perceive I'm about to face in order to get me to consume.”

Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova.

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