Retail and food services sales rose by 0.6 percent in August to $537.5 billion, according to a report out this week from the U.S. Census Bureau. That was worse than the consensus estimate and the prior month’s gain was revised lower. A similar pattern was seen across the core metrics, including a sharp reversal in control group sales which better track broader consumer demand trends. This consumption slowdown, though, should not be too surprising because it supports our earlier argument that the “easy” part of the economic recovery (pent up consumer demand rushing back after the lockdowns were lifted) is behind us and that spending patterns will start to normalize. Apart from extreme base effects and softening sentiment, another reason to have expected consumption growth to slow in August, and likely continue to moderate in the months ahead, was the abrupt expiration of the $600 unemployment insurance boost.
This extra payout has been a crucial lifeline for the millions of Americans still out of work this late into the re-opening, and these individuals should continue to drag on spending growth until Congress addresses the issue (potentially not until after the November elections). However, the vast majority of Americans have been able to keep their jobs this year, and household balance sheets have generally improved in 2020 thanks in part to the $1200 relief payments provided under the initial CARES Act, so any suggestion that consumer spending is about to collapse (save another severe flareup in the pandemic) is just as ludicrous as expecting growth to stay at the double-digit level seen immediately after the lockdowns were lifted. It may therefore be better to focus more on how Americans are spending their money and whether the new habits formed during the pandemic are going to last. For example, sales at building materials suppliers, online merchants (Amazon), and sporting goods and hobby stores are all up significantly on a year-over-year basis while spending at gas stations, clothing and department stores, and restaurants is down markedly. This dichotomy has resulted from the lockdowns and wide-scale work from home (WFH) push that dramatically altered consumer behavior, and the make-up of the various “winners and losers” in the stock market this year arguably reflects such changes. The big question going forward is whether this was just a transitory shift or a longer-term trend that had its timetable accelerated by the pandemic.
Sources: Econoday, BofAML, FRBSL