KEY DATA: Consumption: +1%; Income: -2.7%; Prices: +0.3%/ Construction: +1.4%; Private Residential: +3.7%/ ISM (Manufacturing): -0.6 points; Orders: -7.4 points/ Claims: -36,000
IN A NUTSHELL: “The huge decline in household income is a warning that the economy is still heavily dependent on government social welfare payments.”
WHAT IT MEANS: We may have just finished the strongest quarter of growth in history and there is little question that it was the government that played a major role in the rebound. All you have to do is look at the August income and spending numbers. Total household incomes fell dramatically, as payments for unemployment compensation cratered. The drop was nearly six times the increase in wages and salaries, which by itself was pretty strong. Another way of looking at this is to think of worker income as the combination of wages and salaries and unemployment payments. In July, when the enhanced unemployment payments were still being made, unemployment income accounted for 13.6% of the total. After the enhanced payments stopped, that dropped to 6.4% and the total of the two sources of income declined by 5.4%. Those numbers show how dependent households were/are on unemployment checks. On the spending side, consumption was up strongly. The rise was largely due to people eating out again and no longer being afraid to visit doctors. The rise in vehicle sales helped drive an increase in durable goods demand, but nondurable sales were down. The savings rate, which is still just over fourteen percent, remains high, but it is falling. As for inflation, it is accelerating. Since it remains below the Fed’s target, I doubt anyone cares.
Manufacturing activity was solid in September. Yes, the Institute for Supply Management’s overall index fell, but the level is pretty high. The same can be said of orders, which showed that demand grew robustly, just not as massively as they did in August. Employment cut backs continued, but at a minimal pace. The best news was that both import and export orders are rising. That trade sector has been a real problem for the economy but that may be changing.
The housing market is on fire and that showed up once again in a huge increase in residential construction spending in August. But there was a warning in the data. Private nonresidential activity declined and public construction was up modestly, indicating that not all segments of the economy feel that now is a good time to build things.
Finally, unemployment claims fell again last week. But they are still well above eight hundred thousand and for the month of September, about 3.5 million workers filed for assistance. That is hardly a sign of a robust labor market.
IMPLICATIONS: Household spending came back with a vengeance in the summer. After just the first two months of the quarter, consumption grew at a 37% annualized pace. That is likely to rise with the September numbers. But the economic surge conceals the true state of the economy, which at this point is very unclear. The massive social welfare program, not just the return of workers to private sector payrolls, drove spending. Job gains may be great, but they are slowing and that is causing wage and salary increases to decelerate. Households built up their savings and that has likely cushioned some of the government cutbacks, but the question to ask is the same one I have been asking for months now: What will the economy look like once the twin crutches of household and business free money disappears? The income data imply that we may need those supports for a very long time or consumer and business spending could slow significantly. There are rumors that another stimulus package is in the works and the House may vote out a bill just to show it cares (as if politicians really do things out of the goodness of their hearts). But to pass the Senate, where suddenly some Senators have rediscovered their fiscal conservative religion and once again, claim that too much spending is bad (yes, I have contempt for them, couldn’t you tell?), an agreement with the administration is needed. That may not be so easy. Anyway, tomorrow is employment Friday and given the way the week has been going, I cannot wait to see what that has in store for us.