US Data Preview: Stimulus Gridlock, COVID, Cuts into Confidence

The inability to pass new stimulus measures in the face of rising COVID-19 cases likely had a dampening effect on US consumer confidence in August, even as interest rates have hit rock-bottom, gasoline prices are low and with the US stock markets to a large extent having eclipsed their pre-COVID highs.

When the University of Michigan released its preliminary report for August, it showed a slight uptick in the headline index, but noted that the current conditions readings slipped as concerns that school re-openings will boost cases further. There were also concerns that there will not be a clear or immediate resolution to the need for a new stimulus package as election season approaches.

Michigan will issue its revised reading for the month on Friday, preceded on Tuesday by the Conference Board’s measure. Both are likely to reflect the lack of progress.

July Personal Income, PCE, a Good Start for Q3

While the lack of stimulus and rise in COVID cases are negative factors for August, the July data suggest that solid recovery continued in July, though at slower rates than in previous months. Non-farm payrolls still rose by over one million jobs in July, less than the 4.8 million increase in June, but still impressive by historical standards. While the average workweek slowed modestly, hourly earnings eked out a small 0.2% increase in July after a sharp June decline. As a result, wages and salaries should rise further in Friday’s personal income release.

The continued decline in the level of new initial claims filings should reduce the rate of growth in the state unemployment payments category, but another gain is likely. New claims fell sharply in the first few weeks of August after the enhanced Federal benefits expired before rising in the most recent week, so this category could see a decline in next week’s data.

Return on assets have declined in each of the last five months due to historically low interest rates and the dwindling business dividends. July is likely to make a sixth straight month for this category. The current transfer receipts category fell sharply in May and June, coming down from the April stimulus payment spike. There should be a further decline in July as any remaining remnants of the stimulus program are diminished.

Proprietors’ income posted strong gains in May and June, tracking with the rebounds in retail spending, and should rise in July as well. The reported 1.2% increase in July retail sales was much smaller than in the previous two months, due in large part to a drop in motor vehicle sales. There should be a solid increase in July services PCE spending that more that offsets a decline in goods spending.

The savings rate, which fell sharply in May and June, may finally hit a temporary floor. New spending has been one reason for the declines after a spike in April, but concerns that further unemployment benefits are not forthcoming and that the Fall may bring more, rather than less, COVID restrictions may have convinced consumers to increase their contingency funds.

Consumer prices surged in July, according to the BLS’s CPI report, suggesting both overall and core PCE prices will post large gains for the second straight month. With nominal PCE expected to rise modestly, real PCE should increase even if the PCE price index posts a large increase. As a result, consumption should lend a positive start for the third quarter. Now the question is whether the resurgence of COVID cases cut off that momentum.

Revision to Q2 GDP Backward Looking

The first revision to second quarter GDP will be released on Thursday. Retail sales were revised up in June, which could add to the PCE component and to GDP overall. Other categories are expected to be roughly offsetting, however, even with an upward revision to the 32.9% plunge (at an annual rate, 9.5% before annualisation) reported in the advance reading, there will likely be a “deck chair on the Titanic” feeling about it. It will still be the worst quarter in decades (no matter how you decide to measure it) and could reduce the size of the third quarter rebound.

Instead, the attention will be focused on where the economy goes from here and how much of the second quarter plunge can be recaptured in the likely third quarter GDP rebound that could come on October 29, five days before the general election.

Regional Conditions Data Suggest a Step Back in August

The Empire State and Philadelphia Fed measures released this week suggested slower manufacturing growth for August after solid expansion in July, partially reflecting a concern of COVID resurgence…and that was in states that have seen their case numbers decline.

While the readings for the Dallas Fed will not be released until the August 31 week, there will be plenty of regional data released in the coming week. The Richmond Fed data will be released on Tuesday. The manufacturing portion will look to post a second straight reading in positive territory, but services revenue has remained negative since the start of the COVID shutdowns and could remain there. The Kansas City manufacturing data will be released on Thursday and the nonmanufacturing data released on Friday. Both moved higher in July but could pull back in August due to an uptick in COVID cases. The Philadelphia Fed will issue its August services data on Tuesday after moving just above the breakeven point in July. The region has seen its cases decline in recent months after being an early hotspot.

Ending the week, the Chicago PMI index will be released on Friday, with the August release looking to build on the large jump seen in July.

In contrast to the Empire and Philadelphia readings, the flash estimates for the Markit manufacturing and services readings both rose to their highest points in over a year. The national ISM data will be released on September 1 and September 3.

Low Interest Rates Bad for Savings, Very Good for Housing

The home building data released by the Commerce Department and NAHB this week showed a clear desire to ramp up supply to meet the extraordinarily strong demand in the weekly MBA mortgage applications data. Record low interest rates have more than offset the continued uncertainty and high unemployment rate, as homeowners are using this opportunity to trade up or refinance.

This could be seen the existing homes data released earlier-Friday, which showed the sales pace surged to its highest level since 2006. The NAR said tight supply relative to demand and the desire for larger homes drove the median sales price to a record high level. The pending home sales index, looking ahead at future existing home sales activity, will be released on Thursday.

In the coming week, the Commerce Department’s new home sales data should continue this upward trend with another solid increase when it is released on Tuesday.

Also released on Tuesday, the Case-Shiller and FHFA price indexes will reflect the strong demand that is only beginning to be offset by rising supply. As a result, prices will continue to increase.

Jobless Claims Moving Back Up, or One Week Blip?

Initial jobless claims rose in the August 15 week after two declines, data released Thursday showed. Looking ahead now to the August 22 week data, the question is whether claims can return to their downward trend or is the start of a new build-up.

When enhanced Federal benefits expired on July 31, many analysts believed that the level of new claims filings would decline until a new deal is reached. So, it is possible that some moved to file in anticipation of an extension in the coming weeks. Or more likely, the diminishing stimulus for businesses has resulted in further layoffs.

Colin Lambert

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