Income & Consumption Fall
The November PCE report came out a couple days early because of Christmas. It’s in line with the other data we’ve gotten which shows November wasn’t a great month for consumer spending. As you can see from the chart below, real personal incomes excluding benefits from the government are back below where they were at the start of the year (0.7% lower). Including transfers, incomes are 2% higher than before the pandemic.
Personal income growth was -1.1% monthly which missed estimates for -0.3%. The positive spin here is the personal income miss was due to an 8.5% drop in proprietor’s income. Private wages and salaries growth was 0.4%. In nominal dollar terms, they beat the February high.
Real disposable income fell 1.3% monthly and was up 3.1% yearly. Personal consumption expenditures were down 0.4% monthly which missed estimates by 2 tenths. The chart above shows real consumer spending is 2.7% below pandemic levels.
Spending on goods is 7% higher than before the pandemic because of home improvement and outdoor activities. Spending on services is down 7.1% because gathering is still discouraged. Interestingly, spending on goods fell more in November, but we all bet that reverses in December.
This holiday season was still focused on material items opposed to experiences. Few trips and concerts were purchased. Monthly spending growth on recreation, food & beverages, and healthcare were 1.4%, 0.9%, and 0.8%. The worst areas were clothing and footwear which had a 4.8% decline and food services which had a 4.1% decline.
2021 will be an amazing year for restaurant and clothing sales. People will want to get back what they missed. The personal savings rate fell from 13.6% to 12.9%. It was 8.3% in February. This chart looks just like the change in bank accounts. They are shrinking and people have less room to save. We all want people to spend more because they are more confident not because they don’t have any money to save.
Consumer Sentiment Rises?
Consumer sentiment rose in December unlike consumer confidence. As you can see from the chart below, it’s further off the April low than the Conference Board index. It rose from 76.9 to 80.7 which was because of both current conditions and expectations. Current conditions rose from 87 to 90 and expectations rose from 70.5 to 74.6. There was a big change in partisanship in this survey.
Two times as many Democrats expect a continuous expansion over the next 5 years as 3 months ago (54%). Republicans asked the same question had a decline from 60% to 32%. The two combined went from 87% to 86% meaning there was little overall change.
Jobless Claims Fall Sharply
Initial jobless claims cratered from 892,000 to 803,000 in the week of December 19th which threw off most economists as the consensus was 875,000 and the lowest estimate was 800,000. Non-seasonally adjusted initial claims fell from 942,000 to 869,000. PUA claims fell 57,000 to 398,000. They had been skyrocketing the past few weeks.
These are always tough to gauge because of the fraud. The decline in PUAs and non-seasonally adjusted initial claims combined was 9% which followed 2 increases. This doesn’t mean the labor market is having a good month, but it lowers the chance of there being job losses.
The decline in initial claims was mostly in the biggest states as you’d expect. They fell 48,000 in California which is more than half the drop. Even though California is a big state, that’s disproportionate to its size. California is known for the fraud it had which caused the state to stop accepting claims to get it sorted out. They fell 18,000 in New York and 7,000 in Texas. The other 47 states had a net change of -16,000.
The labor market didn’t exactly have a broad-based recovery. This is why one week of data can’t be the backbone of a thesis. The entire PUA drop was in 3 states, Nevada had a decline of 33,000. This state has had some unusual numbers recently. This decline makes sense after its recent huge spike. Oregon had a decline of 13,000 and Indiana had a decline of 11,000. Those add up to the exact 57,000 decline. Some other states had small increases and declines which net out to zero.
Total people on all benefits fell from 20.65 million to 20.36 million. Continued claims fell to another new cycle low as they were down from 5.507 million to 5.337 million. These are low because of expirations. People move from one benefits program to another.
The good news is pandemic benefits were extended for another 11 weeks. That’s just barely enough to get us past the worst of the pandemic. The government certainly isn’t giving people any extra time, but the virus should be significantly controlled by March.
The latest data shows new cases have probably peaked, but hospitalizations are increasing still. There are now 119,433 people in the hospital which is about double the previous high. The 7 day average of deaths is 2,649. December was the deadliest month of the pandemic.
Some are optimistic January will be better, but it’s tough because next month will start at a much higher level than December did. The good news is more than 1 million people have gotten the vaccines so far. Sometime this winter, the impact from the vaccines will show in the COVID-19 data.
Conclusion
The PCE report showed weakness in incomes and spending, but the decline in incomes was all because of sole proprietors. Wages and salaries actually hit a new record. Headline inflation was only 1.1% and core inflation was 1.4%. This gives the Fed clearance to keep rates at zero, not that there was any chance of a rate hike in 2021 anyway.
Consumer sentiment actually rose, but this data point has been heavily impacted by politics. The Georgia Senate races are still up in the air. Jobless claims fell sharply which goes against the narrative that the labor market will shed jobs in December.
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