Monday, September 30, 2019

Consumer spending has kept us afloat, and it slowed down in August. Now what?

The main thing that continues to carry this economy forward is consumer spending by everyday Americans, which is why the monthly income and spending report by the Commerce Department is a key indicator as to whether the 10-year-long expansion is going to have an 11th year.
That report came out late last week, and it was a mixed bag that indicated the expansion was slowing, but still continuing.
Personal income increased $73.5 billion (0.4 percent) in August according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $77.7 billion (0.5 percent) and personal consumption expenditures (PCE) increased $20.1 billion (0.1 percent).
Those consumption expenditures are pretty soft, and June and July’s figures for consumption had that growth revised down by a total of $28 billion, putting August’s total consumption lower than what July’s was originally reported as.

That’s not the right direction, to be sure. And when adjusting these totals for inflation, you can see that consumption growth has steadily shrunk over the last 6 months measured.

What’s interesting is that the Atlanta Fed has upped its estimated growth for the 3rd quarter in the last few days, now at 2.1%. vs 1.9% last week. This is even with that same report lowering the contribution of GDP growth due to consumption by 0.3%.

Why? Part of it is strength in the housing market, which had a nice rebound in August after interest rates dove during trade war and recession concerns came to the forefront.
Sales of newly-constructed homes in the U.S. increased 7.1% on a monthly basis in August to a seasonally-adjusted annual rate of 713,000, the government reported Wednesday.

That’s up from a revised rate of 666,000 in July, and is just shy of the 12-year high set in June. Compared with August 2018, new-home sales were up 18%...

This summer’s decline in mortgage rates continued to be the gift that keeps on giving. Low mortgage rates were already shown to have sparked a major uptick in home-building activity in August, and sales of new homes naturally followed. “U.S. housing market activity is responding positively to lower rates, another reason why the U.S. economy doesn’t need the extent of interest rate cuts that are priced into financial markets currently,” said Katherine Judge, an economist at CIBC Capital Markets.
It’s worth noting that those interest rates have taken back a lot of their decline in September, so let’s see if home sales go back down in reaction.

The other reason for the Atlanta Fed’s higher Q3 growth estimates isn’t so good. It’s because inventories are growing again, by $3 billion for wholesalers and $1.3 billion for manufacturers. If consumer spending continues to slow and those inventories continue to grow, I can’t think many businesses will be avoiding larger amounts of layoffs and other cutbacks before long.

I’m not going to say that August’s figures are a major warning sign of recession. But it does indicate that things continue to soften as 2019’s second half proceeds, and if September shows further slowing, the sputtering of this economy has to start spreading over into a more widespread issue.

This week’s job report likely won’t show losses, and we haven’t seen a growth in jobless claims yet. But how much longer can that go on as other areas of the economy stall out?

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