Contemplating The (No Deal) Cliff

Contemplating The (No Deal) Cliff

Editor’s note: This article was originally published on Aug. 21 by Menzie Chinn here.

The recovery package cliff, that is. Deutsche Bank research outlines what they think is likely (baseline) and what a no-deal means for disposable personal income.

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Source: Ryan, et al. “Outlook for consumers,” Deutsche Bank research, August 19, 2020.

What does this mean for disposable personal income? Holding constant other components (about $4021 billion SAAR), here’s what it looks like in the two scenarios.

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Figure 1: Disposable personal income (blue), disposable personal income assuming DB baseline of Phase IV fiscal package $1.5-$2 trn and no other changes in other components (dark blue open triangle), disposable personal income assuming no deal and no other changes in other components (solid blue triangle). Source: BEA, DB, Ryan et al., (2020), author’s calculations.

What happens to consumption then depends on (1) the marginal propensity to consume out of disposable income, and (2) the sensitivity consumption to both household wealth, and to uncertainty, with the former having a positive impact, the latter a negative. Here’s the evolution of the two variables, up to the most recent data.

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Figure 2: Household net worth, end-of-quarter, billions of Ch.2012$ (blue, left log scale), Economic Policy Uncertainty index (brown, right scale). Household wealth deflated using personal consumption expenditure deflator. Source: Federal Reserve Flow of Funds, BEA,, author’s calculations.

What will happen to consumption, given the uncertainty regarding parameter stability (who knows what the MPC will be in the aggregate? The benefit cuts will weight on low and middle income consumers heavily, who have a higher MPC, but account for a smaller share of overall consumption), and wealth elasticity, and the impact of uncertainty – of all types, not just policy uncertainty. What we do know is that holding all else constant, a drop in household income will exert a depressing effect on consumption ceteris paribus. Note, the multiplier effect is not contained in the calculations in the table.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Credit: SeekingAlpha

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