INDICATOR: June Income and Spending, July Consumer Sentiment and 2nd Quarter Employment Costs
KEY DATA: Consumption: +5.2%; Disposable Income: -1.8%; Prices: +0.4%; Ex-Food and Energy: +0.2%/ Sentiment: -5.6 points/ ECI (Over-Year): +2.7%; Wages (Over-Year): +2.9%
IN A NUTSHELL: “Consumers were back out spending in June, but with the virus surging and confidence falling, July’s numbers may not be as strong.”
WHAT IT MEANS: Yesterday’s GDP report told us how bad things were during the spring. But with the economy reopening, the data were a lot better as we ended the second quarter. Most impressively, consumer spending soared. All categories of consumption posted sharp increases.
The key services component, which makes up about two-thirds of all consumption, cratered in the early spring. It has come back with a vengeance. Can that continue? It is unclear. After tax income, adjusted for inflation, fell sharply in June. The reason is clear from the data. Just about all the income gain during the quarter came from government transfer payments, i.e., unemployment compensation. As people come go back to work, those numbers fall. However, wage and salary gains came nowhere close to making up for the drop in government largesse. The drop in income and the strong rise in spending led to a sharp reduction in the savings rate, but at 19%, it is clear that most households are still worried about the future and stashing away funds for the next rainy day. Inflation picked up a touch, but it remains low on a year-over-year basis.
Speaking of being worried, the return of the virus has cratered consumer optimism. The University of Michigan’s Consumer Sentiment index plummeted again in July. What the reopenings did for confidence in June, the resurgence took it all away. The expectations index is at its six year low, set in May. That does not bode well for future spending, as the virus is not going away soon.
Employment costs rose at a moderate pace in the second quarter. I don’t really know what to make of this report. It seems to imply the shutdowns and reopenings basically changed little when it came to compensation. Wages and salaries did grow more slowly than had been the case but benefits increased. I am at a loss to figure that out.
IMPLICATIONS: Household spending rebounded sharply as the economy reopened and we could see consumption growth well into double-digits for the third quarter. Whether that will happen will be determined by the virus, Congress and the president. It is clear from the income numbers that unemployment insurance was the major source of income for households, but the $600 per week add on has expired. A failure to renew that payment or a reduction in the weekly amount will cut spending power sharply. Keep in mind, over thirty million people receive unemployment checks, so any reduction will hit consumption hard. The alternative is allowing the economy to stand on its own. I suspect that next Friday’s employment report will be telling. My forecast is for job growth to be less than two million, compared to the 4.8 million gain posted in June. I also expect the unemployment rate to rise.
The virus has slowed, halted or in some cases reversed the reopening process and the private sector is nowhere near ready to go it alone. So, don’t be surprised if we get another round of unemployment add-ons. How much is unclear, but the negative impact on the economy of cutting the current amount and the simple fact that there is an election in three months, tells me that fiscal conservatism is not the highest priority of even fiscal conservatives. I went into this process expecting the $600 to turn into $300, but it is likely to be higher – maybe even $600 again through the election. Survival is the mantra of most politicians. But the political game of chicken (waiting until the last moment to offer a proposal) that caused the payment to lapse is likely to lead to a slowing in consumption until the money starts flowing again. When you combine the surge in the virus with the stupidity in Washington and the massive divisions in the nation, it is hard to be optimistic about the economy achieving a sustained, rapid recovery.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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