KEY DATA: Sentiment: -4.9 points/ Consumption: +0.5%; Disposable Income: -0.8%; Prices: 0%/ New Home Sales: -0.3%; Prices (Over-Year): +2.5%/ Orders: +1.3%; Capital Spending: +0.7%/ Claims: +30,000
IN A NUTSHELL: “Rising unemployment claims and falling consumer sentiment may be the first signs that the virus surge is having a real impact on the economy.”
WHAT IT MEANS: Welcome to the day before Thanksgiving when the economic data tend to get dumped on us by the boatload. And today was no exception. Let’s start with the consumer related numbers. The University of Michigan’s Consumer Sentiment Index fell moderately in November, led by a sharp decline in expectations. I am not sure how to read the consumer optimism/expectations numbers at this time. The election and its bizarre aftermath, where one group is convinced there was massive voter fraud and the other group is convinced that those who believe those claims are massively insane, makes it likely we are seeing political reactions that in the past rarely led to any real economic follow through. Indeed, the report noted that: “For the first time since Trump entered office, Democrats rather than Republicans held a more optimistic economic outlook”. But people also did indicate they are being affected by COVID, so there are some real concerns out there – and there should be.
Indeed, the second consecutive weekly jobless claims increase is something that needs to be watched closely. There is every reason to think that the rise will continue, even if it does not do so on a consistent basis. With virus cases at record highs, with Thanksgiving likely to worsen things and with hospitalizations and deaths surging, mass vaccinations of the population cannot come too soon. But it will be months before that happens and in the interim, restrictions are likely to accelerate, even in states that were unwilling to do anything in the past. Those restrictions may not happen until their hospitals run out of room and deaths jump, but that, unfortunately, looks like it is coming. Don’t be surprised to see not only rising new claims, but also increasing continuing and total claims for the next few months.
And then there is there is the consumer. Consumption rose solidly in October, but again, the data are hard to read. Amazon Days were in October not July and seasonally adjusting that change is, of course, impossible. But given the timing, households may have done their holiday shopping that week, so don’t assume spending will be great this year. One reason for concern was the sharp drop in disposable (after-tax) income. The big decline was in government assistance and there is no reason to think another stimulus bill will be coming anytime soon. Worse, it is unclear how much additional spending can pass the Senate, so we could have a either gridlock or a disappointing new round of stimulus. Consequently, the income just may not be there to spend a lot this holiday season.
Still, the fundamental economy remained in really good shape in October. Not only did consumption jump, but so did durable goods orders. There was a decline in vehicle and machinery demand, but Boeing is back in business and that helped. Most importantly, the measure that tracks private sector capital spending posted another big gain, indicating that businesses remain optimistic about the future.
Finally, the sector that has been leading the way, housing, continues to be strong. Yes, new home sales eased back in October, but given it was 41.5% above the October 2019 pace, I think developers will take it.
IMPLICATIONS: The question is no longer whether the recovery will slow, it will. The real issue is by how much will it decelerate. The longer the virus naysayers keep refusing to take even the basic step of requiring masks, the longer and deeper will be the resurgence. The numbers are staggering but people still don’t believe them. It isn’t “fake news”, a term that is likely to cause chaos in this country for years to come. Maybe the best news is that few are using that term to describe the vaccines that have been announced. Large numbers of people indicated they would not get vaccinated, but it appears that science may actually be winning the day. That would be refreshing as it has been quite a while since the data were believed by many people and politicians alike. That said, we don’t really know how the long it will take before a large enough segment of the population is inoculated so that the virus risk is greatly limited. It does not look like that would happen before the spring, at the very earliest, so growth going forward is likely to be disappointing. On that uplifting note, let me conclude by saying:
Have a safe, healthy and happy Thanksgiving!