Spending Only Down Because Of Labor Day Holiday

Consumer Spending Rolling Over?

Some think the consumer is doing fine. Only the data points that don’t adjust for the Labor Day holiday show recent weakness. Seasonal adjustments need to be made or you will be caught missing the obvious. We’re just trying to note the trends, not focus on small moves each week.

As you can see from the chart below, Chase consumer spending growth fell modestly to -6.5% in the week of September 13th. Commentators say the data is rolling over, but they are likely biased. They look at the stock market’s decline and try to formulate a narrative. Spending isn’t rolling over. There was a bump in growth the prior week because of Labor Day.

That same bump and decline happened with mobility. We also saw the reverse in deaths from COVID-19 as they fell during the holiday and bumped higher afterwards. As you can see from the chart below, there was a blip in airline passenger numbers. 

Some investors thought we were finally seeing a turn in travel after months of barely improving. That will change once Abbott’s rapid tests become available. Expecting an improvement in flying before then is foolhardy.

On September 14th, Rennova Health announced that it purchased and took delivery of equipment to provide rapid testing for COVID-19 at 2 hospitals in Tennessee and one clinic in rural Kentucky. Testing will begin this month in all 3 facilities. It seems like Abbott’s rollout has been slow. They promised 10 million tests in September and 50 million in October. There are only 1.5 weeks left in September and we have no data on how many have gone out.

Stronger Consumer Sentiment

September consumer sentiment index from the University of Michigan improved which supports the strong reading from the Bloomberg consumer comfort index. This supports the point that consumers are doing better. Weakness in spending after the holiday is temporary. 

A big variable that impacts consumer spending is job creation. Recent strong decline in initial and continued claims explains why consumers are more confident. Investors are expecting a pretty strong labor report on October 2nd.

Overall sentiment index rose from 74.1 to 78.9 which beat estimates for 75 and the highest estimate which was 77. It’s down 15.3% yearly. Both segments increased almost equally. Current conditions rose from 82.9 to 87.5 as the chart above shows. Expectations rose from 68.5 to 73.3. I strongly doubt consumers are looking at the jump in COVID-19 cases in Europe when stating their opinions. They are probably feeling more confident about the labor market. 

Many consumers are still likely worried about the potential for COVID-19 and shutdowns to come back. However, the stock market doesn't matter much. Most consumers think the stock market is completely disconnected from the economy (based on anecdotal evidence).

This upcoming election has started to impact expectations. Democrats became more confident. In theory, if Democrats were negative on the economy because of Trump, they might be more confident now since there is a chance he loses. It wouldn’t be surprising if Democrats are more likely to think Trump will lose. 

Currently, Biden has a 58% chance of winning, based on biased polls. Most will have no comment until we get polls after the first debate. When asked who will win, it was virtually tied. 5% more thought Trump would be better for the economy and 7% more thought he’d be better for finances. 

Republicans seemingly became less confident. Obviously, if this survey is manipulated too much by politics it becomes useless. It’s good Republicans became less confident because it means some of the political effects were canceled out.

Goldman’s Estimates

Goldman Sachs’ estimates on the unemployment rate and core PCE inflation are seen in the charts below. It's good to show them because it tells us what most investors are thinking. It’s impossible to predict where the labor market and inflation will be 5 years from now. It’s tough to predict where the economy will be next year. As you can see, Goldman predicts a sharp decline in the unemployment rate until Q2 2020 after which it starts to gradually decline to the high 3s.

Inflation has a general uptrend which is strongly impacted by base effects next year. I am very confident core PCE inflation will rise above 2% for a few months next year and the Fed will correctly ignore it. A most interesting part is it sees core PCE inflation rising steadily from 2023 to 2025. 

It will finally get above 2% in 2025. That means if inflation rises above 2% in 2022, it will be unexpected. We don’t know where inflation will be then, but it shouldn’t be surprising if it rises. We will have nearly full employment.

If Biden wins and we get a minimum wage increase, that could boost inflation. A new upcycle in commodities is coming within the next 1-2 years as demand increases when the economy fully reopens. Energy supply is about to get even tighter in the next few months as fracking production falls off a cliff. There are sharp decline curves. Plus, with oil this low, there isn’t new drilling. Finally, in the past few years, energy companies haven’t had access to capital.  

Conclusion

Card spending and air travel fell in the 2nd week of September after spiking due to Labor Day. Consumer confidence increased. Data is starting to be impacted by politics which can muddy the water. Some are moderately bullish on the consumer in that we don’t think this holiday shopping season will be dreadful. 

Goldman’s estimate for inflation is a little too low. And the 10 year yield is going to increase soon. It has been remarkably stable in the past 5.75 months. A key technical point to watch is 90 basis points which was the peak on June 5th. It’s currently at 70 basis points. 

Spread the love

Comments are closed.