The Consumer Comeback
The month of May has turned out to be a month of unexpected news for the U.S. economy, and it’s not the bad kind of unexpected news. A couple weeks ago we received data reflecting a turning point in the unemployment figures as quarantine restrictions eased across the nation. While a misclassification error was disclosed in the Bureau of Labor Statistics (BLS) unemployment report, the overall trend, when adjusting for it, still showed strong signs of improvement. And in addition to news of a recovering labor force, this Tuesday revealed the resiliency of the American consumer.
U.S. retail sales rebounded sharply in the month of May, recovering 17.7% compared to the previous month’s 14.7% fall, as mentioned in our President’s, Rhonda Ducote, weekly correspondence letter sent out yesterday. Much of this could be attributed to the stimulus payments and recurring unemployment checks, as well as pent up demand for certain goods and services seen by a significant uptrend in bank deposits due to the quarantine limiting consumer spending for months. In addition, retail sales excluding motor vehicles grew by 12.4% in May, indicating that auto purchases contributed strongly to achieving 17.7% growth in total retail sales. The importance behind this indicates that consumers are still comfortable making large financial commitments in the current environment.
However, overall spending remains lower compared to pre-covid levels, $485.5 billion in May compared with $527.3 billion in February. This isn’t too surprising that consumer spending isn’t fully back to pre-pandemic levels, but the uptrend from April’s bottom is without a doubt significant. Especially from a macro view, personal consumption accounts for nearly 68% of the U.S. economy.
So, onto the important question: is this level of consumption sustainable? It’s fair to say government aid has been a large contributor to relieving some of the financial stress in families and businesses; both through fiscal (think policies passed by Congress & the President) and monetary (the Federal Reserve) policies. However, with everything that’s been rolled out through the CARES Act and support from the Fed in supporting financial markets and households, Powell’s congressional testimony stressed that complacency in the numbers we’ve achieved so far will only hurt us in the coming months. He outlines that this moment is crucial and dialing back too quickly on fiscal aid, specifically the unemployment benefits, could have immensely negative effects. Which in itself shows the level of severity as most Fed officials in the past, including Powell himself, have steered clear of voicing their opinions on fiscal policies.
Opposition have also voiced their opinions on the potential long-term impact that additional spending could have on the nation’s debt load. Although, last month Powell was interviewed on 60 Minutes where he mentioned that the federal deficit should be addressed in times of economic prosperity, and not prioritized when there is a much greater need to support a struggling economy.
One of the primary headwinds to consumer spending is the $600 in additional weekly unemployment benefits that is set to expire at the end of July. The debate currently circulating Congress is whether to extend the program. Last month, House Democrats passed a $3.5 trillion stimulus bill, but Senate Republicans prefer the wait-and-see approach to monitor which parts of the previous stimulus package provided effective support. Senate Republicans primary concern with extending unemployment benefits is that it could be incentivizing a lot of workers to not look for work as the economy further reopens. While this reason does have some merit, officials also recognize that doing away with it altogether would be a major hit to consumers. As such, reducing the payouts is being considered by the Senate and the White House; estimates between $250 and $350. While a reduction could impact overall consumer spending habits, the actual effects from any possible changes won’t be seen until the later weeks of August and September.
The sweet spot is likely somewhere between what the 2 parties want. A proposal issued by well-established economists – Jason Furman, Timothy Geithner, Glenn Hubbard, and Melissa Kearney – found a cap at $400 a week could be that sweet spot. The goal is to provide enough aid to struggling households, while not substantially impacting consumer spending in the long run (which in turn impacts the economy).
Right now, the American consumer is stronger relative to the beginning of the pandemic, and both the Fed and federal government are still rolling out measures to support us. With how well the market has been performing since March’s low, less discounted opportunities are in surplus but we are still actively monitoring our watch list for opportunities as they appear. As always, please reach out to us with any questions or concerns. Stay safe everyone!