With consumer spending accounting for the bulk of U.S. economic output (GDP) it is worth again reviewing some of the recent developments related to this important component of the recovery.
Indeed, earlier this month we learned that consumer sentiment deteriorated in August, according to the popular University of Michigan poll, and this was in many ways confirmed by The Conference Board last week. Specifically, the headline consumer confidence index fell to 113.8 in August, the lowest reading since March but notably well above the 85.7 low hit in April 2020 during the heart of the lockdown and peak COVID uncertainty.
This supports our earlier argument that the August reading in the U of M survey was probably overstating consumer pessimism because if taken at face value it would imply Americans feel less optimistic now than they did during the worst parts of the pandemic last year. Nevertheless, general consumer confidence still weakened markedly in August. The Delta variant was the main driver of this latest development as the constant influx of news headlines about hospitals being inundated with new COVID patients, many of whom were fully vaccinated, along with the reinstatement of mask mandates and other restrictions in several regions of the country have likely raised doubts about just how quick the return to pre-pandemic normalcy will be. Confidence was probably also dented in August by the embarrassing U.S. withdrawal from Afghanistan and continued rise in the price for consumer goods, but the sentiment reading might have been much worse if not buoyed by stocks at record highs and a very strong labor market.
With respect to the employment situation, more than half (54.6 percent) of consumers in The Conference Board’s August survey considered job availability to be “plentiful” at the moment, and roughly a fifth of respondents expect even more jobs to be available in the months ahead. Similar proportions of consumers reported that they anticipate business conditions improving during the remainder of the year, as well as an increase in personal income. Incoming labor market data continue to support consumers’ bright outlooks for employment and earnings, and this is perhaps the best reason to expect general consumer confidence to rebound in the months ahead following the weak August readings. More help will come as the pandemic-related news headlines start to improve, although it remains unknown how the various COVID variants will respond to the return of cold weather this winter. A rebound in confidence will also be needed to help sustain consumer spending over the next few months.
This is especially important because consumption was already showing signs of losing momentum ahead of the latest variant headwinds and could face additional challenges in the near term as many of the pandemic-related emergency benefits finally expire. The $300 per week Federal Pandemic Unemployment Compensation (FPUC) supplement, for instance, will disappear on September 6 in the remaining states that opted not to announce an early termination. For some perspective, total personal income in American totaled roughly $1.7 trillion in July, according to the U.S. Census Bureau. Unemployment benefits accounted for roughly 2 percent of that figure, which may seem small but is significantly larger than during normal (pre-pandemic) times when unemployment insurance typically represents less than half a percent of total income. Moreover, unemployment benefits added around $32 billion to personal income in July and this should shrink to just $3 billion following the September expiry of the federal boost.
Will this by itself result in a collapse in consumer spending over the next few months? Of course not, but it will be yet another transitory issue adding noise to the incoming economic data. Perhaps more importantly there are offsetting factors that should lessen the blow from the enhanced benefits termination, such as the still in place Child Tax Credit, elevated personal savings, and rising wages for the Americans that are working. Put simply, if consumer spending continues to cool in the near term it is more likely to be due to sentiment than household finances.
What To Watch This Week:
- U.S. Holiday: Labor Day (Markets Closed)
- 3-Yr Note Auction 1:00 PM ET
- MBA Mortgage Applications 7:00 AM ET
- JOLTS 10:00 AM ET
- 10-Yr Note Auction 1:00 PM ET
- Beige Book 2:00 PM ET
- Consumer Credit 3:00 PM ET
- Jobless Claims 8:30 AM ET
- EIA Natural Gas Report 10:30 AM ET
- EIA Petroleum Status Report 11:00 AM ET
- 30-Yr Bond Auction 1:00 PM ET
- PPI-Final Demand 8:30 AM ET
- Loretta Mester Speaks 9:00 AM ET
- Baker Hughes Rig Count 1:00 PM ET