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September NonManufacturing Activity and Employment Trends and August Help Wanted OnLine

KEY DATA: ISM (NonMan.): +0.9 points; Orders: +4.7 points; Employment: +3.9 points/ ETI: +2.8%/ HWOL: +1.7%

IN A NUTSHELL:  “Another set of reports; more signs of continued recovery.”

WHAT IT MEANS: The good numbers just keep coming.  Today, the Institute for Supply Management reported that activity in the service and construction portions of the economy continued to improve in September. Sixteen of the seventeen industries indicated they expanded.  Only Professional, Technical and Scientific Services was down.  It is hard to explain why that one group didn’t follow the crowd, but it is rare to see any survey that everyone is on the same page.  Indeed, less than eight percent of the respondents said activity slowed over the month, making it clear that the expansion is quite broad based.  The details of the report were quite solid as orders rose sharply and employment moved from contracting to growing.  The one warning sign was that order books have pretty much stop fattening despite the solid increase in demand.  

The Conference Board released two labor market related measures today and both pointed to further gains for workers, though not as massive as they had been.  The Employment Trends Index, rose again in September as all eight of its components were up.  Clearly, the improvement in the employment situation is pretty much across the economy as we saw last Friday in the jobs report. That was the good news.  The less good news was that the index is about half of what it was in February, showing how far we still have to go to get back to where we were.

The second Conference Board release was its August Help Wanted OnLine Index, which posted a somewhat modest gain.  But don’t get fooled by the less than spectacular rise.  The measure is only about four percent below its high.  Firms are looking for workers like crazy, even with the unemployment rate near eight percent.   Job gains may continue to decelerate, but compared to normal times, they should still be strong for the remainder of the year. 

IMPLICATIONS:The labor market has done a lot better than expected since the economy has reopened.  Nevertheless, total nonfarm payrolls are still 10.7 million below the peak in February.  It could take another three years or more to get back to that level, assuming a moderately effective vaccine is approved and is widely available and accepted sometime during the first half of next year.  The economy is not going to fully reopen and indeed remains at risk, until the vaccinations are widespread.  Keep in mind, just because a vaccine is approved, that doesn’t mean large numbers of people will get the shot or shots immediately.  The CDC shot itself in the arm (pun intended) by giving the impression, accurate or not, that it was susceptible to political pressure.  That is likely to slow the acceptance of the vaccine and increase the time needed to get most of the population immunized.  Until that happens, the final stage of the reopening will take a long time and as we have seen from recent events, hot spots are likely to appear anywhere if not everywhere without the vaccine.  That implies job growth will slow as the easy part of the reopening is largely done.  Now comes the hard part: Finishing the reopening, weaning ourselves off government welfare and cleaning up the mess created as firms that have been hanging on give up.  And I don’t even want to think about what the election will bring. 

August Consumer Prices, Real Earnings and Help Wanted OnLine

KEY DATA:  CPI: +0.4%; Over-Year: +1.3%; Ex-Food and Energy: +0.4%; Over-Year: +1.7%/ Real Earnings: 0%; Over-Year: +3.3%/ HWOL: +1.7%

IN A NUTSHELL:  “Inflation is making its way back toward the Fed’s target, but it is still not a major risk.”

WHAT IT MEANS:  Once upon a time, inflation was something economists and even central bankers worried about.  Not so much now that the Fed has announced it will allow inflation to run above target for an extended period.  Nevertheless, we do need to follow the numbers.  Consumer prices jumped again in August, led by the continued rebound in energy costs, as well as a surge in used car and clothing prices.  In contrast, shelter expenses remained tame, food prices settled down and health care expenses, which had been exploding, took a breather.  Price gains over the year are moving back toward the two percent level, though they still have a way to go.  But who really cares about food, energy, housing or clothing?  What really matters is the index for cakes, cupcakes and cookies.  Those prices cratered in August and are down from their August 2019 level.  I’m happy. 

Inflation really matters when it starts restraining household spending power significantly.  That is where real earnings, which adjusts for inflation, comes in. For consumers to buy more, their incomes have to rise faster than inflation.  In August, that didn’t happen.  Also, the increase in inflation-adjusted income, over the year, is decelerating as lower-wage workers get pulled back into the economy.  This is a weighted average and the distribution of job gains across industries and professions makes a difference.  Initially, those lower paid workers lost their jobs at a huge pace, raising the weighted average.  Now that they are being rehired, they are lowering the average back towards its pre-pandemic level.  But for the individual worker, not the economy on average, rising inflation is not good news, no matter what the Fed thinks. 

The Conference Board’s Help Wanted OnLine index rose solidly in August after having skyrocketed in July.  It is closing in on its all-time high set in January.  Total payrolls may still be down by 11.5 million employees, but demand for workers is solid, indicating job gains should remain strong.     

IMPLICATIONS: The Fed has made it clear that when it comes to its dual mandate, stable inflation is job three.  First comes the unemployment rate, then comes something else, maybe equity prices, and lagging well behind is inflation.  If it is too hot, so be it.  And that is not a bad approach to take, given we have been in a too-low inflation environment for a long time.  Inflation can ultimately be controlled if it is too high, but too low a rate creates the risk of falling into a deflationary environment.  If that happened, the economy would be in real trouble.  So, while we watch the inflation numbers out of habit, I suspect their value will be limited for a very long time, except for its impact on consumption.  Given that wage gains have been limited for over a decade, it is hard to see why they would accelerate in this still very high unemployment rate environment.  Rising inflation remains a negative indicator, but for consumption not for interest rates.  Right now, workers are making more money, but by working longer, not by getting pay raises.  With the Fed on hold for who knows how long, once the reopening process settles down, the outlook for consumption may not be as bright as many in the markets are currently planning for.  But with the demand for labor still high, we may not see a significant moderation in total household spending until next year.

August Employment Report

KEY DATA: Payrolls: +1.371million; Private: +1.027 million; Federal Government: +251,000; Retail: +249,000; Unemployment Rate: 8.4% (-1.8 percentage points); Wages: +0.4%

IN A NUTSHELL: “The labor market continues to heal extremely rapidly.”

WHAT IT MEANS:  The continued reopening of the economy is working its magic in the labor market. In August, job gains were robust and the increases were spread across the economy.  Indeed, an extremely high 69% of the 258 industries measured saw payrolls rise.  And the details were quite strong as well.  There were huge job gains in general merchandise stores, restaurants and temporary help companies.  All three added over one hundred thousand workers.  Health care payrolls boomed as doctors’ offices reopened.  But the largest gain was in the public sector. The federal government hired 238,000 temporary census workers to try to complete the census, which is behind schedule.  In contrast, sectors such as construction and manufacturing added more moderate numbers of employees.  Given the ramping up of vehicle assemblies and the surge in home construction, that could change soon.  

On the unemployment front, there was a surge in the number of people employed, over 3.7 million, and the number of people unemployed dropped by 2.8 million, leading to a surprisingly large decline in the unemployment rate.  This occurred despite a rise of nearly a million in the labor force and a solid increase in the participation rate.  In other words, all the metrics were great.    

Finally, there was good news in the report for workers.  Hourly wages rose solidly and the workweek was up, meaning that weekly earnings rose strongly.  

IMPLICATIONS:This was a strong report that shows the recovery remains on track.  The labor market has come back faster than expected and we are seeing improvement in all segments of the economy and the workforce.  But as usual, the question of whether these gains are sustainable remains.  The unemployment rate is still about five percentage points above where it was in February and payrolls are down by 11.5 million workers.  There is still a lot of work to do.One thing this report does is complicate the negotiations over another stimulus package.  For those who, after having voted to explode the budget deficit, have suddenly remembered that they don’t like government welfare payments, this report could strengthen their resolve to deny another package gets passed, since the need is not nearly as great as it had been.  But it also undercuts the arguments of those who support additional massive government stimulus, that the economy is a disaster.  It is, when looked at on an absolute basis, but relatively speaking, it is not as big a disaster as it had been.  In politics, what passes for reality is, well I have no idea, so any and all economic views are likely to be presented.  Consequently, it is unclear where we go from here in those discussions.  As I noted yesterday, it is uncertain which month we might start seeing the negative effects of the ending/running out of the stimulus payments.  There were no signs of that in the August employment report.  But if we have to wait for October to get the negative numbers that might trigger an agreement, and given it takes time to get any further stimulus into the system, the risks to growth remain to the downside.  Nevertheless, the markets are likely to see in this report the improvement in the economy and given that good news is great news, mediocre news is very good news and bad news is good news, don’t be surprised if investors continue to party.

August Manufacturing Activity and July Construction Spending

KEY DATA: ISM (Manufacturing): +1.8 points; Orders: +6.1 points; Backlogs: +2.8 points/ Construction: +0.1%; Private: +0.6%; Residential: +2.1%

IN A NUTSHELL: “The manufacturing sector is picking up some serious steam and could start pushing housing for the number one driver of growth.”

WHAT IT MEANS:  Some of the latest economic numbers are truly amazing.  The housing sector is flat out flying and now it looks like manufacturing is beginning to follow the same path.  The Institute for Supply Management reported that its index of overall activity rose solidly in August to the highest level in two years.  That may not seem like a long time but it was before the pandemic and after the tax cuts, so we are talking real strength.  And the good news was not just the headline number: The details were just as strong.  New orders are jumping as the recovery spreads.  Even with output ramping up, demand is outstripping the added supply and backlogs are building and inventories are falling.  That bodes well for future production.  There was just one negative number in the report: Payrolls continue to be cut, though the rate of decline is moderating.    

Construction spending edged up in July, but the gain was all in residential activity. Spending on lodging, office, commercial, health care, education, religious and amusement and recreational projects were down.  It was worrisome to see that government spending on major infrastructure projects such as health care, education, public safety, highways and transportation declined. State and local governments just don’t have the money to invest in their future.

IMPLICATIONS: Can housing and manufacturing keep it up?  It has been about a month since the enhanced unemployment checks stopped coming, so we haven’t seen the impact that may be having on consumer spending.  Since there is not much chance that exports, which are way down, will pick up sharply, and given that government spending is being reigned in, we need households to spend like crazy if the economy is to keep the V-shaped recovery going.  There are only so many new homes we can build before the market gets out of hand.  We know what that leads to.  But today we saw that the private sector is not doing a lot of building, outside of housing, while state and local governments are strapped for cash and are hardly in the mood to spend what they don’t have.  I have said since early April that the fourth quarter of this year and the first quarter of next will determine the future condition of the economy.  A second quarter collapse and a third quarter rebound were baked into the cake.  I had assume back in the spring that the government’s willingness to keep both households and businesses on welfare would have run out by now, but as usual, I underestimated the willingness of politicians of all stripes to spend when it suits their purposes.  Once we clear the election, it is likely that most of Washington’s handouts to businesses and households will fade away.  That is why the fourth quarter and first quarter of next year are so critical.  Without the federal government’s largesse, and with unemployment still likely to be extremely high, the ability to sustain growth will depend upon household and business confidence in the future.  So, maybe the most important numbers going forward will be the confidence measures.  As for the markets, happy days are still here and as I keep saying, the trend is your friend until it isn’t.    

July Durable Goods Orders

KEY DATA: Durables: +11.2%; Ex-Transportation: +2.4%; Private (Core) Investment: +1.9% 

IN A NUTSHELL: “The economy is roaring back.”

WHAT IT MEANS: The economy seems to be rebounding at a startlingly robust pace.  The recent economic data have come in above forecasts, especially when it comes to housing, and now we see that businesses are getting back into capital spending mode.  Durable orders soared in July, blasting through expectations.  In a rarity, there was not one major sector that posted a decline in demand.  This report was filled with crazy good numbers.  Orders for vehicles and parts soared to its highest level since this measure was introduced in February 1992.  The government is pitching in as defense capital goods demand jumped 30% and for the first seven months of this year is up over 12% over the same period in 2019. As for businesses, they are spending on capital goods again and the level is back to where it was in February. Interestingly, despite the surge in orders, backlogs are declining, which raises questions about future gains in manufacturing production and hiring.  

IMPLICATIONS: Well, it looks like the National Bureau of Economic Research, the keeper of the business cycle, may have to start thinking about dating the end of the recession.  Yesterday, we got another sign that the housing market is booming when new home sales skyrocketed in Julyand that goes along with other housing data.  Today we saw that investment in big-ticket items is in the stratosphere.  And the stock markets keep hitting new record highs.  It is almost as if there was no pandemic and few firms or households were harmed greatly by the shutdowns and losses of income and demand.  Am I the only one that thinks something strange is going on here? We need to step back from the numbers a little.  Are the reports we are seeing sustainable?  Households don’t seem to think so.  The Conference Board’s August report on consumer confidence fell sharply and the University of Michigan’s Sentiment Index remained at the lowest level in eight years. Optimism about the future is ebbing. Twenty eight million people are still receiving unemployment checks and their payments have been cut sharply. The special hazard pay put in place for critical workers is disappearing, further eroding spending power.  The world economy is weak, at best, and trade is minimal.  And the pandemic is surging along, largely unchecked and with schools and universities reopening, the number of new cases and deaths are likely to start rising again in the new few weeks.  Yet happy days are here again.  So, what is it that businesspeople know that households don’t see?I just don’t get it but as traders like to say, “the trend is your friend”, so just go with it. 

July Existing Home Sales and New Home Pending Sales

KEY DATA: Sales: +24.7%; Over-Year: +8.7%; Prices (Over-Year): +8.5%/ Pending Sales: +5.3%; Over-Year: +32.7%

IN A NUTSHELL: “Home sales and prices are soaring and the end is nowhere in sight.”

WHAT IT MEANS:  The stock market and California are not the only places on fire: Housing is just as hot. The National Association of Realtors reported that existing home sales skyrocketed in July to the highest level in nearly fourteen years.  The surge in demand was across the nation, with gains in the thirty percent range for The Northeast, Midwest and West and over nineteen percent in the South. Homeowners are seeing the strong market and are listing their houses, but with mortgage rates low and demand jumping, the supply of houses, at 3.1 months at current selling rate, is the lowest on record.  That led to a sharp rise in prices, to its highest level on record. Amazing.

And the new home market looks like it is just as strong.  Meyers Research reported that their New Home Pending Sales Index also jumped in July.  New home demand was up sharply in June and it is likely it will post another major rise when the July data come out next Tuesday.   

IMPLICATIONS: Housing is one of the most important sectors in the economy as home construction and sales touch firms in a variety of industries.  When the housing market booms, sales of products related to homes rise significantly as well.  The low mortgage rates have induced people to buy, buy, buy, but the sharply rising prices are a warning that the market may be getting a little ahead of itself.  Still, I will take any positive data that shows people are willing to spend money, especially on big-ticket items.  Looking forward, we need consumers to keep spending.  While those who can and do work from home are mostly doing fine, the number of people unemployed remains in the double-digits.  That raises questions about consumption of nondurable goods and services.  Services are about two-thirds of all household spending and it has been the weakest link.  Since February, total consumption has declined nearly seven percent.  Almost ninety percent of that drop was due to lower spending on services.  So, if you want to know if the consumer is coming back, you have to pay attention to services demand.  And that requires all income classes picking up the pace.  With everything going on, I am not sure how quickly that will occur, especially since we are just getting into the ugliness of the presidential campaign.  That cannot be good for consumer confidence.       

Weekly Jobless Claims, August Philadelphia Fed Manufacturing Index and July Leading Indicators

KEY DATA: Claims: +135,000/ Phila. Fed (Manufacturing): -6.9 points; Orders: -4 points; Employees: -11.1 points/ LEI: +1.4%

IN A NUTSHELL: “The recovery is moving forward, but signs that the pace is moderating are spreading.”

WHAT IT MEANS:  The economy this year has been like the weather in so many areas: If you don’t like it, wait a minute and it will change”.  Are we starting to see another change in the direction of growth?  We just may be.  Consider first the labor markets.  For the first time in five months, the weekly jobless claims number rose. Now let’s not get too crazy about this increase.  In normal times, with normal levels of claims, the numbers bounce around all the time.  And anyone who thinks you can seasonally adjust a data set on a weekly basis without getting some volatility, has not tried to seasonally adjust any number. It really cannot be done.  Still, with the government’s business and household income subsidies running out, it isn’t clear whether those firms that are just hanging on can make it.  It has been expected (at least by me) that by the end of the summer, many firms could throw in the towel, meaning claims rise for while going forward.  It is way too early to say that, but the claims increase is at least a yellow flag.

On the manufacturing front, conditions are still good but they may be moderating.  The Philadelphia Fed’s August manufacturing index declined somewhat more than forecast.  Order growth eased, as did hiring, while backlogs have started to decline.  That said, the sector is still expanding at a decent pace and firms continue to hire more workers.  In addition, firms are able to push through more price increases, though their costs are going up as well.

Looking toward the future, the outlook is good, as long as you put things in perspective.  The Conference Board’s Leading Economic Index increased at a less robust pace in July than it did in May and June.  Notice I said “less robust pace”.  In normal times a 1.4% rise would be viewed as pointing to stronger growth ahead.  But looking out to the fall and winter, it implies that growth will come down from its elevated third quarter pace.  That should surprise no one as the consensus for third quarter GDP is up about twenty percent.  That rate of growth is obviously not sustainable.  Thus, when the report notes that “The LEI suggests that the pace of economic growth will weaken substantially during the final months of 2020”, it is not necessarily saying we are headed into a recession – only a slower growth phase.

IMPLICATIONS: I don’t want to make too much of a deal out of the rise in unemployment claims last week. I would normally just chalk it up to the normal ebb and flow of the data and that is likely what happened. But there appear to be many in Washington who seem to think the economy can stand on its own and doesn’t need any additional stimulus or if it does, it should only get enough to get through the November election.  I don’t believe I am alone when I say that is really questionable thinking.  Most economists believe as I do that more help is needed.  Without it, consumer spending, which is likely to set a record for growth this period, could wind up being quite modest in the fourth quarter.  Firms that have used the government largesse to help pay workers will discover they actually have to make money on their own to cover payroll costs and with consumption lagging, those funds just might not be there.  So, while the economy may look red hot right now, the fire could dim pretty quickly. Of course, if we get a sharp drop in claims next week, all this turns into a “never mind”, which is what I suspect most investors are thinking.       

July Housing Starts and Permits

KEY DATA: Starts: +22.6%; 1-Family: +8.2%; Multi-Family: +58.4%; Permits: +18.8%; 1-Family: +17%; Multi-Family: +22.5% 

IN A NUTSHELL: “When it comes to housing, the recession is well in the rear view mirror.”

WHAT IT MEANS:  Another housing report, another sign that this sector is leading the way back toward a more normal economy.  Actually, there is nothing “normal” about the housing sector.  Instead, we are talking boom times.  Housing starts soared in July, led by an enormous rise in multi-family construction.  This segment tends to have large ups and downs, but a nearly sixty percent jump is well beyond large.  Thus, don’t be surprise if there is a drop in multi-family starts in the August or September numbers.  That would not be a sign of weakness.  As for the key single-family segment, it is strong as well, just not out of control. For the first seven months of this year, total housing starts are up nearly five percent compared to the same period in 2019.  Given everything that has happened, that is amazing.  Regionally, there were increases in excess of thirty percent in both the Northeast and the South, while the Midwest and West posted gains in the six percent range.  Looking forward, permit requests skyrocketed as well, with both the single-family and multi-family segments posted robust gains.  Over the past three months, permits have exceeded starts by nearly six percent, indicating that the sector has more room to grow.

IMPLICATIONS:The reopening of the economy may not be going smoothly everywhere, but it is going incredibly well in the housing sector. Low rates and, at least to some extent the desire to live in less dense locations, have helped drive up demand and home construction is growing to meet that demand.  Since banks don’t usually consider most people on unemployment to be good borrowing risks, the mess in Washington over another stimulus bill may not have nearly as big an impact on housing as it might on consumer goods and services spending.  And with the Fed in no hurry to raise rates, the housing market has a chance to continue leading the way.  As for the economy overall, we have to wait until we get not just the August consumer data but more importantly the September ones as well to determine if a lack of stimulus funds made a major difference.  Third quarter growth is likely to be record setting.  The only issue is how big a record is set.  Housing, by itself could add hugely to growth.  It subtracted about 1.75 percentage points in the second quarter but could twice that in the third, a swing of over five percentage points.  Still,we’ve known for months that third quarter growth was going to be amazing, so we have to start focusing on fourth quarter 2020 and 2021 activity.  Where we go after the summer is up in the air. If Washington does the right thing, 2021 could be really solid.  If not, the recovery could fade. My view is that asking Washington to do the right thing is a bridge too far, so I am less optimistic than other economists.  But, as the saying goes, we shall see

Weekly Jobless Claims and July Import and Export Prices

KEY DATA: Claims: 963,000 (down 228,000)/ Import Prices: +0.7%; Nonfuel: +0.2%; Export Prices: +0.8%; Farm: +1.5% 

IN A NUTSHELL: “Despite the slowing in the reopening process, the labor market continues to stabilize.”

WHAT IT MEANS:  Has the virus resurgence begun to show up in slower economic growth?  That is not yet clear.  Or, maybe we really don’t know what is going on with the data.  Take the weekly jobless claims report.  For the first time since mid-March, initial unemployment claims were below one million.  I guess that is good news, though the number is still almost 4.5 times what it was a year ago.  So we still have a long way to go to get back to anything close to normal.  Continuing claims, which represent people remaining on the rolls, fell as well, but here too, you have to put the number in perspective. Almost 15.5 million people are collecting unemployment checks compared to 1.7 million a year ago.  The recently passed laws covering unemployment payments have extended out the number of weeks that a worker can receive those checks.  Two programs, the Pandemic Emergency Unemployment Compensation and the Extended Benefits programs, provide up to an additional twenty-six weeks of checks and the numbers in those programs are starting to grow.  In other words, while jobs may have started to become more available, they are well below what is needed, as seen by the number of people collecting compensation.

On the inflation front, there were three reports released this week, the Producer Price Index, Consumer Price Index and today the Import and Export Price Indices.  All indicate that inflation is rebounding from the ultra-low levels hit in the spring.  Imports prices, led by the continued rebound in energy costs surged.  However, food and vehicle prices were down, capital goods costs were flat and consumer goods prices rose moderately.  But imports don’t reflect services costs and for consumers, those are soaring, especially health care.  On the export side, farmers are seeing some really large price gains, after four brutal months of declines.  That said, export prices are still down over the year by over three percent, so the agricultural sector has a way to go to get back to where they were last year.

IMPLICATIONS: Should we be worried about what appears to be building inflation pressures?  Not necessarily.  In the spring, many businesses were forced to cut prices as demand disappeared.  Now, with the economy starting to recover, they are taking the opportunity to recover some of those discounts.  In other words, there is no such thing as a free economic rebound.  Prices are rebounding as demand picks up.  That is a good sign as it reflects growing economic activity.Indeed, I would read the inflation data as representing more the state of the economy than any sudden ability of firms to raise prices.  The increases are not likely to last long, especially if the reopenings continue to slow.  One question mark is back-to-school demand, which may look little like previous years. Technology may reign as so many schools are going virtual to start the year, but clothing sales may falter.  That could mess up the retail sales numbers, as the seasonal factor may not be able to adequately handle the temporary change in student needs.  As for investors, you know that insanity is the operative word when people actually thought the Russians perfected a vaccine many months before the rest of the world – and they actually acted on the report.  I don’t think it is time to roll up our sleeves. Even if saner heads ultimately ruled, when the markets react to such wacko reports, you know that things are out of control.  What I don’t see investors understanding is that most of the income flowing into the economy came from the government’s support programs.  But because of gridlock in Washington, they are gone, reduced or running out.  Where consumers and businesses will get replacement funds to buy goods and services or pay workers is anyone’s guess, but investors have decided not to even think about that.  Love that pixie dust.   

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.  Idon’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.