A rebound in expectations lifted the Conference Board consumer confidence index more than expected in August, but the details were fairly downbeat. The index gained 1.4 points to a six-month high of 103.3 as expectations rose to the highest in a year. However, the current situation metric, while also improving, remained at its second-lowest level since April 2021! Moreover, the important labor differential metric (which measures the difference between those who think jobs are abundant and those who think jobs are scarce) weakened to the lowest level since March of 2021. This is one of the many metrics that support Chair Powell’s assertion at the Jackson Hole symposium that the labor market today is looser than it was back in 2019.
The second read on Q2 GDP growth brought a two tenth upward revision to 3.0% seasonally adjusted annualized (saar), primarily on account of stronger consumer spending. Normally, this would be welcome, but this revision pushed spending patterns even further out of line with underlying income growth (Figure 2). We anticipate a meaningful downshift in consumer spending during the third quarter, especially in light of the clear uptick in the unemployment rate in recent months, which should incentivize an increase in precautionary saving. There were modest downward revisions to investment and government spending that did not alter the big picture. As we wrote at the time of the initial release, the double-digit gain in private fixed investment looks unsustainable (it reflected an aircraft-driven 50.9% saar surge in transportation equipment). And the 2.0% saar decline in residential fixed investment seems too small in light of housing starts data so we anticipate a further decline in Q3. All in all, this update did nothing to change our assessment of the economy, which is slowing but not entering a recession in the near term.
The divergence between spending and income was further underscored by the decline in the personal savings rate to 2.9% in August. With the exception of a 2.7% print in June 2022, this was the first sub-3.0% reading since April 2008! 2022 was a time of elevated excess savings so a period of dis-savings at that time was not at all problematic. However, that dynamic is more troubling now and poses a risk to the sustainability of consumer spending. To be fair, consumers also have a lot of accumulated wealth that can independently support consumption, but that is concentrated among higher income individuals who may not boost their consumption further anyways. As such, labor income become the most important determinant of consumer spending going forward. Its growth rate has moderated in line with slower payrolls growth, shorter hours worked, and slower growth in nominal wages. It grew 0.3% m/m in July, following June’s 0.2% gain. Overall nominal income also grew 0.3% m/m in July, and real disposable income grew 0.1%. Nominal personal spending grew 0.5% m/m, and real spending rose 0.4%.
Although 30-year fixed mortgage rates have come down more than 80 basis points from the recent late-April peak, home sales continue to languish. Pending home sales unexpectedly declined 5.5% m/m in July—implying a weak reading for existing home sales in August. Sales declined most in the Midwest and the South, with the Northeast the relative outperformer (though pending sales declined there as well). We had argued previously that once it becomes clear that the Fed is kickstarting an easing cycle, buyers may be incentivized to wait until more of those cut expectations feed through into lower mortgage rates. Given that supply of existing homes for sales has risen of late, the likely potential pullback in prices adds another reason why buyers may benefit from more rushing.
Admittedly, the home price data remains mixed. The S&P Corelogic Case Shiller metric shows prices rising at a steady pace in the latest data and still 6.5% higher than a year prior. But the FHFA price metrics showed prices retreating 0.1% m/m in June and up a moderate 5.1% y/y.
There was little change in the University of Michigan consumer sentiment index for August between the preliminary and final releases; the initially reported uptick in the headline was maintained, just modestly softened. The improvement was attributable exclusively to better expectations as assessments of the current economic situation actually worsened. As to the rise in expectations, the most noticeable uptick was among democratic party supporters, with sentiment among independents up only marginally, and down among republican party supporters. Clearly, President Biden’s decision to not seek re-election has had an impact on consumer sentiment. Elsewhere, inflation expectations were well behaved. Short-term (1 year) inflation expectations dipped one tenth to 2.8%, the lowest level since December 2020, while long-term (5-10 year) inflation expectations were unchanged at 3.0%, where they’ve stood since April.