Big Consumer Sentiment Spike In June
Final June consumer sentiment reading was 78.1 which was slightly below the preliminary reading of 78.9. It’s tough to tell if that small decline at the end of the month matters. You would think sentiment would be getting worse now because stocks are declining and COVID-19 cases are going up in the south and the west. Let’s ignore this slight decline and say this was a good report. But we can expect weakness in the July preliminary reading. That report comes out on the 17th.
Specifically, in the June report, sentiment was up from 72.3 to 78.1. There were improvements in present conditions and expectations. Present conditions index rose from 82.3 to 87.1 and the expectations index rose from 65.9 to 72.3.
The chart below breaks down sentiment by region which is important because the south and the west are seeing an uptick in cases, while the northeast and the Midwest are seeing declines. That has correlated well with sentiment. As you can see, in the south sentiment only rose 0.5 which was less than the previous month.
In May, it looked like the economy was rebounding and it seemed like the south avoided the worst of the crisis. A couple months ago, the governor of Florida bragged about how well his state did. Unfortunately, that’s no longer the case. South went from having the 2nd most confidence to the worst confidence.
In the west, confidence rose 3.3 points as it went from the best to the 2nd best. Confidence in the northeast rose 19.1 points as it went from last to first. This was an all-time record increase. We are about to see the same compositional effect as we saw with cases. In other words, confidence in the northeast doesn’t have much room to rise, but confidence in the west and the south has room to fall.
Think about it this way. Northeast just had the highest increase ever. It’s unlikely with the spike in cases in America and the decline in stocks that confidence increases that much again. On the other hand, it’s surprising confidence even rose in the south and the west. If we had access to the weekly data, it would likely show declines in these regions in the 2nd half.
That’s not predicting a new low in confidence like how we had a new high in cases, but that confidence will likely fall. That means spending growth will stop improving. That’s why stocks have declined recently. It’s a bump in the road of the recovery. That was the problem with buying stocks in early June. You were essentially betting on the recovery to be completely smooth which is highly improbable.
Income Growth Reverses Because Of April Stimulus
May PCE report is extremely interesting. It’s not tradable because the market is already focused on the potential decline in spending growth in early July. However, knowing the details is important. You can’t only focus on the future because the past helps contextualize expectations.
Income growth was negative because the $1,200 stimulus ($500 for children) occurred in April. Monthly growth fell from 10.8% to -4.2% which actually vastly beat the consensus of -6.4%. Everyone knew the comp was tough. There wasn’t a stimulus, so even though compensation rose, income fell.
Even though the critics like to complain the direct payment wasn’t a big deal, it was. 68% of people who were unemployed got paid more to stay home. A family with 2 adults and 2 children received as much as $3,400 in direct payments. This was a good deal for most lower income workers.
As you can see from the chart above, on average each household saw an increase of $170 in compensation because of higher wages and salaries as people went back to work. There was also $550 in unemployment benefits. Gains were counteracted by the $1,300 on average that households got in direct payments in April that they didn’t get in May.
On the other hand, consumer spending growth was 8.2% which rose from the 12.6% decline last month and missed estimates for 8.6%. This was the reverse of income because people were able to go out more. Even though income fell, consumers had so much savings from April, they had enough to spend. That’s what’s known as pent up demand.
Spending caused the savings rate to drop from 32.2%, which was a record high, to 23.2%. In June and July workers will still get the extra $600 in unemployment benefits. We can expect more help after that expires on July 25th. That being said, spending is still down 11% from February. Given the increase in consumer confidence and the improvement in COVID-19 for much of June, spending should get closer to the February level. However, if sentiment and spending drop in July, that doesn’t matter.
Low Inflation Again
As expected, inflation barely existed. There was a 0.1% monthly increase in both the core and overall PCE price index. Core met expectations and overall inflation was expected to be 0%. On a yearly basis, headline inflation was 0.5% which was 0.1% above estimates. Core PCE was 1% which was 0.1% above estimates.
The chart above shows Oxford Economics’ forecasts for core PCE inflation. They believe core PCE inflation will avoid going negative. That’s not a bold prediction because the worst of the recession is likely behind us. Investors should be more concerned with the possibility of high inflation due to the Fed and government’s stimulus.
To be clear, most don’t see it as an immediate threat, but it’s entirely possible for it to be problematic next year. Low inflation is my base case, but you should always looking for potential risk factors.
As you can see, through 2022 Oxford Economics doesn’t see above 2% core inflation even with the coming easy comparisons. That means the Fed isn’t going to be pressured to hike rates. It’s not going to unwind its balance sheet, so that’s not an issue either way.
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