KEY DATA: Consumption: +0.6%; Disposable Income: +0.3%; Prices: +0.2%; Ex-Food and Energy: +0.2%/ Sentiment: -8.6 points
IN A NUTSHELL: “Households may have shopped in July, but declining savings and faltering confidence creates concerns about consumption going forward.”
WHAT IT MEANS: They came, they saw, they bought. Okay, it is not really a good idea to compare consumers with Julius Caesar, but you get the picture. Households were out there spending in July. Indeed, they spent heavily on everything: Durables, nondurables and services. So, why am I worried? Income did not keep up with spending. Wages rose modestly, a problem I have discussed for quite a while. Though that has not stopped people from spending up to this point, it may start restraining demand going forward. Both the savings level and savings rate dropped to their lowest levels since November 2018. Households are still saving at a decent pace, but the reduction in total savings is a warning sign. The kicker from the tax cuts may be fading. And we will not have another Amazon and copycat sales by other retailers for a while. As for inflation, it was moderate. A jump in energy costs offset a decline in food. Both the overall Personal Consumption Expenditure index and the “core” index remained in the 1.5% range, which is well below the Fed’s 2% target.
A second reason for concern about consumer spending is the sharp drop in the University of Michigan’s Consumer Sentiment Index in August. The decline was the largest since the end of 2012. Both components faded, but the expectation decline was twice as large as the current conditions fall off. It was noted that the key factor in the faltering of household perceptions was the trade war. As noted, “Compared with those who did not reference tariffs, consumers who made spontaneous negative references to tariffs also voiced higher year-ahead inflation expectations, more frequently expected rising unemployment, and expected smaller annual gains in household incomes”. It should be pointed out that the Conference Boards Consumer Confidence Index fell only modestly in August.
This week’s numbers came out in drips and drabs and they told differing stories. Solid July durable goods orders and capital spending, as well as a pick up in the Chicago Business Barometer points to a stabilization in the manufacturing sector. But soft home prices and a decline in pending home sales indicate the housing market is not getting any major boost from the low interest rates. MARKETS AND FED POLICY IMPLICATIONS:Forecasting the economy is hard enough when you only have to deal with trends in the economic numbers. It is now clear that the overarching issue is the trade war, which is a political strategy that has economic implications. Since it is the president’s policies (and tweets) that have to be determined first and then a probability placed on both the magnitude and timing of the policies, it is clear that any forecast is limited in its nature. But economic forecasts are not limited in their value. Forecasters have to make their own determinations of the factors just mentioned and then include those guesses into their models. What we see is a growing belief that the war will continue for an extended period and is likely to ramp up. And that is leading to more and more economists indicating that a recession within the next year is an expanding, if not likely, outcome. Of course, on the other hand (hehe), a sudden end to the trade war would likely allow the economy to continue growing, though maybe not at a very strong pace. Still, up is better than down. So, my suggestion is that the president should simply declare victory and bring the troops home.