KEY DATA: Consumption: +8.2%; Disposable Income: -4.9%; Prices: +0.1%; Over-Year: +0.5%; Ex-Food and Energy: +0.1%; Over-Year: +1%/ Sentiment: +5.8 points
IN A NUTSHELL: “Households are spending again, but there is still a long way to go to get back to where we were.”
WHAT IT MEANS: We are starting to see the impact of the economy reopening and the early signs are positive. Consumption soared in May, led by a huge rise in durable goods i.e., vehicle sales. Still, spending was up sharply in every category, a clear indication that people are ready and willing to keep spending more. They have a long way to get back to where they were. The number to compare is February spending and the May level is still off by over eleven percent. In addition, the prospects for spending are somewhat cloudy. It is all up to the federal government. Disposable personal income fell sharply, but that was expected and that highlights the issue facing the economy. Income gains and losses are being driven by massive changes in government social benefit payments. They skyrocketed in April as the unemployment rolls soared. As people are rehired, those income transfers will decline. To put this in perspective, in April, government payments rose by $3 trillion, offsetting the $700 billion decline in wages and salaries. In May, government benefits dropped by $1.1 trillion, but wages and salaries increased only $233 billion. It is the government that is keeping spending going, not the private sector and that exposes the economy to the whims of Congress and the administration. With incomes falling, the savings rate declined, but the 23.2% rate is still enormous. As for inflation, prices stopped falling, but they are hardly rising.
With the economy reopening, you would expect confidence to surge. It is rising, but not once again, at a somewhat disappointing pace. The University of Michigan’s Consumer Sentiment index was up solidly in June, but the level is still up only about ten percent from its April low, while it remains nearly twenty-three percent below the February high. We are looking at 2014 numbers. Both current conditions and expectations increased a similar amount. One troubling element in the report was the final index being lower than the mid-month level. The virus looks like it was the reason for that downturn. The gains in the South and West, where the virus is surging, were significantly lower than in those areas where progress against the virus continues to be made.
IMPLICATIONS: The economy faces a dual threat: The resurgence of the virus and the vagaries of politics. While the states suffering major jumps in new cases have not pulled back, some have slowed the reopening process. That could be enough to cause people to become less willing to go out and spend at stores and restaurants or return to high-density work locations. It is clear that large-group gatherings are not going to happen for quite some time. That raises questions about the ability to repopulate office building and as a consequence, the ability of those firms that depend upon those workers to survive. The summer should have been a time of reviving hope, but the virus operates on its own timetable. And then there is Congress and the administration. From the income numbers, it is clear that the major force in keeping things from falling apart is the enhanced unemployment compensation and to a lesser extent, the PPP. Like it or not, the extra $600 per week is pumping massive amounts of money into the economy. It is currently slated to end July 31st. The PPP is not going to grow. Put that together and the prospects are that without action, income could crater in August and spending will follow. Consequently, something will have to get done, but the more the government is the income provider of last resort, the higher the budget deficit and the greater the issues will be on the other side. The Committee for a Responsible Federal Budget forecasts this year’s deficit at $3.7 trillion using just current law, not any expected additional assistance. Don’t be surprised if the deficit is well north of $4 trillion. That is incomprehensible, but no one is giving it even a first thought. It is nice to look at the monthly data and think everything is beautiful and happy days are here again. While the focus of attention must be on keeping the economy going, we also have to start thinking about what the economy may look like when we get through this. That is what will ultimately determine the direction of the markets in the medium term. Right now, few seem to be doing that.