Consumer Is Improving

We’ve gotten some negative data on the consumer. The biggest one was the Redbook same-store sales reading. However, most of the data has been good. As you can see from the chart below, consumer spending growth using Chase consumer cards improved this past week. That’s a boon to the economy and it means the temporary job losers are getting their jobs back. 

As you can see, it seemed for a couple of weeks that growth was stagnating. Being in the high negative teens is not the place you want to get stuck at. That stagnation is probably over as the growth rate improved from -17.9% to -16.6% in the week of June 7th. That directly goes against the Redbook report since it’s from the same week.

The tracker was up 2.6% from the last week and it’s up 24.9% from the low of -41.5% in the week of March 31st. This improvement is likely the fastest in economic history, justifying the stock market’s initial rally. 

University Of Michigan Sentiment Improves

Some investors correctly called the bottom in consumer sentiment. Unless the $600 weekly benefit from unemployment insurance doesn’t get extended and the unemployment rate is in the high single digits in August, the bottom in sentiment is definitely in. 

To be clear, there will likely be somewhat of an extension. Maybe there will be a $300 benefit instead. It’s highly likely the unemployment rate will at least be 7% in August. It's hard to imagine it falling further. Best guess is it will be near 9%. After a big drop in June, the decline will be more modest. We can expect the rate will fall much more in June than it did in May.

By the way, the stock market could impact sentiment, but we don’t see enough volatility to counteract people getting their jobs back. For example, say someone gets their job back and their state reopens. While that happens, the stock market falls 10%. That person will still be confident unless he/she has major investments. The stock market won’t be as impactful as it usually is.

As you can see from the chart above, the consumer sentiment index improved from 72.3 to 78.9 in the preliminary June reading which was still a 19.7% yearly decline. The current reading is very high for a recession. This level is only met when recessions are ending or starting. We know this recession isn’t starting because the data is getting better. If the index improves a bit more in July, it will confirm the recession is over. This was probably the shortest recession ever.

This time the index was helped by the current and future categories. The current conditions index was up from 82.3 to 87.8 which was a 21.5% yearly decline. This improvement is in line with the Chase card spending reading. Similarly, the expectations index was up from 65.9 to 73.1 which was an 18.1% yearly decline. The consumer isn’t exactly optimistic; it’s just way less pessimistic than it was in April.

Consumer sentiment improved because of gains in the outlook for personal finances and the prospects for the national economy due to the reopening. The labor market is improving. Amazingly, more consumers expect a decline in the jobless rate than at any time in the history of this survey. That jives with the chart below which shows that when a higher percentage of layoffs is temporary, there is a quicker decline in the unemployment rate.

We only got a small taste of the decline that is to come in the May report. Everyone was surprised that the decline started as early as it did. Next, they will be surprised at the speed of the improvement. We can expect the biggest decline in the unemployment rate in history. It should fall 2 to 3 points. It will be limited by the number of people hopping back into the labor market. There’s also the possibility that renewed shutdowns hurt the labor market, but the shutdown in Houston hasn’t happened yet.

Sentiment survey shows few consumers expect a reestablishment of favorable conditions soon. Consumers simply expect a recovery. We are about to have an unprecedented recovery. Even still, normalcy won’t appear until 2021 at the earliest. 2/3rds of consumers expect bad times financially in the next year and almost half expect a renewed downturn. That all depends on if we have a 2nd wave of cases.

Bad news is 14 states are seeing an increase in cases now. This is supposed to be the best time seasonally as we await the 2nd wave in the fall. Take every positive people say about the economy and throw it out the window if there is a bad 2nd wave. In this report, the most common reason for a renewed downturn is a resurgence of COVID-19. That makes perfect sense. Consumers’ worry about persistently high unemployment caused them to worry about a slow recovery. Some disagree with them there.

The virus and unemployment have increased uncertainty. That caused a record high in income uncertainty which has hurt discretionary spending. The good news is the net level of certainty has troughed as you can see from the chart above. Concerns have been mitigated by discounts on prices and interest rates. 

There actually haven’t been discounts on houses though as sale prices were up 3.1% and ask prices were up 9.9%. It’s kind of weird how strong the housing market has been. You can say the people who lost their jobs weren’t planning to buy a house anyway, while the people who have enough money for a house weren’t as hurt by the recession. Demand was simply pushed back; it didn’t go away. Demand is actually up 25% from before the recession.