Incoming reports on Americans’ consumption behavior have generally surprised to the upside throughout most of the COVID-19 crisis. Looking ahead it is easy to expect the pace of the recovery in consumer spending to moderate, not just due to obvious base effects but also because household sentiment appears to have deteriorated recently. For example, The Conference Board’s headline consumer confidence index fell to 84.8 in August, much worse than the 93.0 consensus estimate and the July print was revised slightly lower. Once could assume that the “second wave” of the coronavirus again weighed on sentiment but infection statistics have steadily improved in August, and residents in some of the “hot spot” states actually appeared more optimistic this month than in areas that have generally avoided the summer uptick in cases. Economic conditions are therefore probably a better explanation of regional sentiment variations at the moment, e.g. the unemployment rate in Texas is roughly half of New York’s level of joblessness. However, even in the states that appear to be faring relatively well this crisis, both employment and confidence remain far below pre-pandemic levels.
Further, the percentage of consumers saying jobs are “plentiful” declined to 21.5 percent in August, according to The Conference Board, and those claiming jobs are “hard to get” increased to 25.2 percent. This is not too surprising since over a million new Americans are still filing for unemployment benefits every single week. The good news is that the trend in continuing claims for unemployment insurance, i.e. people collecting jobless benefits for longer than a week, continues to decline, meaning that as long as another major flare up in COVID-19 cases is avoided labor market conditions should continue to gradually improve. Confidence gauges should also rise, albeit at a lagged pace relative to the broader economic recovery as many consumers appear to have lingering concerns. The percentage of surveyed Americans expecting business conditions to improve over the next six months, for instance, declined to 29.9 percent in August, while those expecting business conditions will worsen increased to 20.5 percent. Consumers’ outlook for the labor market was also less positive, according to The Conference Board, as the proportion expecting more available jobs in the months ahead declined to 29.1 percent, and those anticipating fewer jobs increased to 21.9 percent. Despite this pessimism, real-time consumer spending metrics remain very encouraging. Consumption holding up well even as sentiment deteriorates continues to be helped by the unprecedented financial support provided by the government for out-of-work Americans. Congress will start scaling back some of this relief as the economy continues to improve, but a recent Goldman Sachs analysis estimated that even if the extra unemployment insurance payout is cut to just $300 per week around half of recipients would still have an income replacement rate of at least 100 percent (down from three-quarters of UI recipients at the current $600/week level).
Sources: Econoday, The Conference Board, WF, BofAML, GS, FRBSL