The latest retail sales report from the U.S. Department of Commerce signaled another jump in consumer spending, but it is important to remember that this particular data release was for the month of January. This matters because most Americans not only just received another relief check ($600) from the government around the start of the year but there were also a lot of promises being thrown around by politicians for even more “free money” to shortly follow. Add to this a handful of other positive developments in the economy along with the continued string of encouraging vaccine headlines and it should not be surprising that more Americans felt less inclined to save in January. However, pointing this out is not intended to suggest that the recovery is running out of steam but simply that we will want to see continued spending growth in the months of ahead to better confirm the recent momentum. A broadening in consumption should also occur as the nationwide vaccination process continues, in turn allowing more of the lingering business restrictions that devastated the important U.S. services sector to finally (and permanently) be lifted.
All of this means the incoming consumption data in the near-term is likely to remain very noisy, and that consumer sentiment may therefore be able to provide more signal regarding how self-sustaining spending growth will be as we exit the COVID crisis. To this end the latest data from the University of Michigan suggests that there remains a lot of work left to do. Indeed, the headline confidence index declined in February to a 6-month low, and even at its post-lockdown peak this measure was still well below pre-pandemic levels. Optimism about the future continues to weigh the most on overall sentiment, but present situation assessments also deteriorated in February, particularly among lower-income Americans. A similar gauge from The Conference Board suggests consumers had a slightly more positive assessment of economic conditions in February, although the proportion of respondents expecting greater job availability and higher income in the months ahead decreased. Another concern for some consumers appears to be inflation, as the University of Michigan’s survey series has found a marked uptick in expectations for rising prices in the years ahead. Obviously there are problems inherent to asking the typical American to provide a precise, multi-year inflation forecast, but what really matters is the trend in responses, and consumer respondents clearly anticipate price pressures will pick up going forward. This belief by itself can affect spending behavior, and inflation’s impact on interest rates is also important. Moreover, if Americans believe borrowing costs are rising and the price for goods and services is increasing, then this will only give more weight to perceived wage growth in consumers’ spending (and employment) decisions.
Sources: Econoday, U.S. DoC, UoM, The Conference Board, FRBSL