Faltering confidence
Consumer confidence fell in August to a new pandemic low after the increase in COVID-19 cases throughout the summer increased pessimism about an economic recovery. The index that reads consumers’ feelings about the economy right now fell from 95.9 in July to 84.2 in August. The index that reads consumers’ feelings about the economy six months from now fell from 88.9 in July to 85.2 in August – not nearly as steep of a fall but still a new pandemic low.
Moral of the story: Americans have somewhat figured out how to live in the midst of COVID-19 – people are returning to restaurants and movie theaters – so it’s difficult to see how confidence is lower today than it was during peak lockdown. It is possible consumers were expecting a V-shaped recovery and a return to pre-COVID life much sooner, so the persistence of COVID-19 cases and the high unemployment coupled with reduced federal unemployment benefits might be weighing on this index.
Jackson Hole Symposium
Every year since 1981, central bankers, finance ministers, academics, and financial market participants from around the world have been gathering at the Economic Policy Symposium in Jackson Hole. This exclusive event is closely followed by the market as comments from big names can move stock and currency markets. This week, the Fed announced significant changes to its policy strategy. The biggest change was a shift to an “average inflation target” of 2% – since inflation has been running below 2%, they’d be looking for inflation above 2% in the future – bringing the average to 2%. The other meaningful change was regarding the Fed’s approach to employment in a way that now focuses on labor market strength, especially at the lower end of the income spectrum.
Moral of the story: Practically, this all means the Fed will be less inclined to raise interest rates when the unemployment rate falls and the market loved to hear it.
Losing steam
Consumer spending increased for the third month in a row, but at a much slower pace (less than 2%), indicating the economic recovery is losing steam. Consumers spent more in July on new cars and trucks, healthcare, restaurants, and (surprisingly) lodging as people are starting to travel more. The overall level of spending, however, is still about 5% lower than the pre-COVID days. Prices of these consumed goods and services (aka inflation) has fallen to a meager 1% as many companies had to cut prices to attract customers as sales plummeted.
Moral of the story: Consumer spending has actually held up better than expected given Congress’ deadlock on further assistance. Growth is likely to soften or even stall completely if there they don’t get their *act* together (pun intended). The loss of income means consumers spend less, which means businesses have lower sales, which prevents them from hiring, which leads to a loss of income. We’re unfortunately stuck in a little bit of a chicken-and-egg situation here.