The great spending split
Nominal consumer spending activity continued to rebound in June, rising 5.6 percent month-over-month (MoM). More forward-looking indicators point towards flat nominal spending in July relative to June as COVID cases surged throughout several parts of the country. One unique trend in this recovery has been the pronounced difference in spending bouncing back for goods compared to services.
There has been a pronounced V-shaped recovery in YoY growth of goods (chart P.1, right) as consumers are more easily able to substitute e-commerce spending for face-to-face spending compared to services. In contrast, services spending continues to struggle and remains well below last year’s levels. This bifurcation in the way consumers are spending, in part, explains why manufacturing activity has bounced back so quickly while other more services- focused industries are facing a slower recovery.
Given that services spending made up roughly 60 percent of total consumer spending as of June, it is clear that without a stronger rebound in services spending, overall consumer spending will take longer to recover. We do not anticipate positive YoY growth in nominal spending until the second quarter of 2021.
Potential income cliff on the horizon
In this month’s forecast update, we have become more pessimistic about the MoM gains in consumer spending in the coming months. The primary reason is the expiration of enhanced unemployment benefits of $600 per week at the end of July. While a newly issued executive order is set to restore $300 to $400 of this benefit depending on the state, the funding source for the benefit may only last a little over a month by our calculations. With so many individuals still unemployed, we anticipate that consumer spending will be softer in the months ahead. We now expect the Nominal Personal Consumption Expenditures (NPCE) to contract 4 percent this year and bounce back by 5.8 percent in 2021.
Key assumptions and risks
As with any forecast, some assumptions have to be made in order to project beyond the current quarter. Our forecast assumes that no further stimulus packages are passed through the end of 2021 and future surges in COVID-19 cases will not result in a widespread shutdown of the economy. Of course if a stimulus package is passed, there would be some upside risk to our forecast depending on the provisions included, while widespread shutdowns, in our view, would dramatically increase the probability of a double dip recession.