Consumers Spending Like There Is No Tomorrow

Scott Anderson
Posted by Scott Anderson
Chief Economist

U.S. economic data continues to surprise on the upside through July.

The retail sales report for July reveals a remarkable rebound in retail sales has occurred over the last three months as the U.S. economy reopened for business and government transfer payments bolstered consumer confidence enough for consumers to return to stores with a vengeance.

Nominal retail sales are now above the levels seen before the pandemic started and 2.7% above year ago levels, making a full recovery and then some. This sets up a robust rebound in annualized Q3 real consumer spending growth in the next GDP report.

But it is difficult for me to get too enthused about this fortunate turn of events when the U.S. economy has only recreated about 40% of the jobs that disappeared in March and April. The U.S. unemployment rate still exceeds 10.0%. And surveys show more and more American’s are relying on government support to meet their daily expenses. This vulnerability could become an Achilles’ heel for consumer spending and the U.S. economic recovery in the fourth quarter, if government supports propping up the U.S. economy are further delayed or scaled-back in the quarters ahead.

Some of the retail spending we are seeing in recent months, especially in electronics, autos, and furniture, etc. is likely being turbo charged by rocketing stock market prices, declining interest rates, and pent-up consumer demand as cabin fever reaches unprecedented levels. People are desperate to get back to some semblance of normalcy as they feel they have very little control over this pandemic.

They do have some control over how they spend and what they spend on. But pent-up demand may prove fleeting, especially if the reality of widespread unemployment takes hold in consumers’ psyche or the stock market recovery to new record highs turns out to be just a bear market bounce.

Electronic store sales were also bolstered in July by one time demand from students needing new computers and iPads for remote learning.

Finally, political and policy risk are on the rise as the U.S. election approaches. The ultimate outcome is extremely difficult to predict and the uncertainty alone could begin to weigh on markets, consumer confidence, and spending as we enter the fourth quarter. Enjoy the dog days of summer, because I don’t see clear blue skies ahead.

I guess what I am saying is the U.S. expansion is off to a good start, but it’s too early to take it off government life support. Most of the pillars this retail sales rebound are built upon may be built on unstable ground.

To learn more, check out this week’s U.S. Outlook.

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