Consumer spending bouncing back with job gains
Nominal consumer spending activity surged 8.2 percent (MoM) in May, with leading economic data pointing towards another acceleration in June. On a YoY basis, nominal spending remains 9.3 percent below last year’s spending level. Consumer confidence for June rebounded to 98.1, the highest reading since March. More importantly, consumers’ expectations about future economic conditions posted a sharp rise, signaling consumer confidence in the economy is starting to take hold. The future expectations component is most closely tied with overall consumer spending activity.
We expect that nominal consumer spending will continue to post improvements in the coming months, but it will take some time to get back to the spending levels of 2019. Another key test will be how much aggregate income is lost once enhanced unemployment insurance (UI) benefits expire at the end of July. While recent job gains have been impressive, it is unlikely that the bounce back in wage and salary growth will be enough to offset the expiration of UI benefits. Nominal consumer spending is expected to contract 5.7 percent in 2020 before rising 4.6 percent in 2021.
Interest rates to aid some sectors
The Federal Reserve is widely expected to keep interest rates low for the foreseeable future as they do their part to help aide the recovery. In addition to keeping short-term interest rates low, the Fed is supporting other markets and keeping longer-term interest rates, such as mortgage rates, low as well. These actions should serve as a tailwind to growth in the coming months as consumers reconsider where they would like to live in a post-COVID world. The low rates should help to fuel further home sales activity and support a rebound in auto sales activity.
Downside risks to the outlook increasing
One of our biggest concerns has begun to materialize: a second wave of COVID infections. The question now is how will state and local government officials respond to surging cases around the country. As of now, it appears that mandatory mask wearing is becoming the de-facto response to fight new infections rather than another round of lock-downs. Should more lock-downs be implemented, there would be considerable downside risk to our outlook. Furthermore, the surge in cases threatens the initial bounce-back in the leisure and hospitality sector and could lead to further layoffs if consumers lose confidence again.