KEY DATA: Sentiment: +9.1%; Current Conditions: +6.7%: Expectations: +10.9%/ Import Prices: +1%; Fuel: +20.5%; Food: +2.2%; Exports: +0.5%; Farm:-0.5%
IN A NUTSHELL: “Households are feeling a little better about the economy, but they are hardly exuberant.”
WHAT IT MEANS: To get the economy really going, we need households to start spending a lot more. How they feel about things will be the key factor in consumption and confidence is rising. The University of Michigan’s Consumer Sentiment Index rose solidly in the first part of June. Households have seen the unemployment rate go down and they feel a little better about the labor market. That said, this is hardly a “happy days are here again” report. As the statement noted: “… few consumers anticipate the reestablishment of favorable economic conditions anytime soon. Bad times financially in the economy as a whole during the year ahead were still expected by two-thirds of all consumers, and a renewed downturn was anticipated by nearly half over the longer term.” While uncertainty about the future is beginning to ease, it is still higher than it was at anytime during the Great Recession. That raises questions about the willingness to purchase big-ticket items. If we don’t see that happen, the recovery will be slower than hoped for.
As for inflation, import prices rose in May, but you can chalk that up to the rebound in petroleum costs and the continued increase in food prices. Crude petroleum led the way, rising by over thirty percent. Food costs were driven by jumps in meat and vegetable prices. Excluding those two categories, the cost of foreign products entering the country fell slightly. On the export side, the long-suffering farm sector took another hit as prices sold around the world declined again. They are now off by 3.5% since May 2019.
IMPLICATIONS: There is no reason that inflation should surge, which is important as the Fed is embarking on flooding the economy with massive amounts of liquidity. The energy price increases we have recently seen represent the ending of the price war between Russia and Saudi Arabia. Prices should settle down now. As for food, eventually the supply chain will start catching up and while we may see a few more months of elevated food cost increases, those should also move back toward more normal levels. So the Fed has a green light to do whatever it wants to do – and from Chair Powell’s comments this week, it intends to do that. Still, the Fed can provide only liquidity; it cannot get income into workers hands or convince people to spend. That would require a combination of fiscal policy and improving consumer confidence. From the Michigan survey discussion, it is clear that the threat of a resurgence in the virus continues to hang heavy on household thinking. With so many states seeing an uptick in cases, the impact on confidence could offset, at least to some extent, the improvement created by the reopening of the economy. Also, as we go through the summer, the income supplements are slated to disappear. That raises questions about the ability of many households to keep spending even at their reduced pace. Thus, there remain many uncertainties facing the economy.
The markets have bought into the V-shaped recovery with no impact from a virus resurgence. But the extent of the right side of the V is in doubt. Yesterday’s meltdown is an example of what could happen once the surge in job gains fades after the economy largely reopens and if the current uptick in cases accelerates and becomes more widespread. The exuberance has taken us almost all the way back and it can have long legs. Alan Greenspan gave his famous irrational exuberance talk in early December 1996. The market (NASDAQ) kept going up for another 3.5 years. When the music will stop, if it ever will, is anyone’s guess, especially given all the liquidity the Fed is pumping into the system. But as we saw on a number of occasions over the past twenty years, if it does, the impacts can be massive.