Last week was jam-packed with economic news, with reports covering wide swaths of the economy released. Both major measures of consumer confidence for August revealed mixed results. This week will be busy once again, with updates focusing on business confidence and the August employment report.
Last week’s news
On Tuesday, the Conference Board Consumer Confidence Index for August was released. Unexpectedly, confidence fell from 91.7 in July to 84.8 in August, against forecasts for a modest rise to 93. This report marks the second month in a row in which the index has declined, following its rebound to 98.3 in June on the back of reopening efforts across the country. With these disappointing numbers, the index dropped to its lowest level in six years, driven by cratering consumer views on the current economic conditions. This result was surprising, given the better-than-expected numbers revealed by the advance estimate of the University of Michigan consumer sentiment survey released earlier in the month. Improving confidence typically supports faster consumer spending growth, so this result bodes poorly for consumer spending growth in August. It should be noted, however, that consumer spending continued to grow in July despite lowered confidence during the month.
On a brighter note, Tuesday also saw the release of July’s new home sales report, which surprised to the upside. The pace of new home sales rose from an upwardly revised 791,000 in June to 901,000 in July, against economist estimates for 790,000. Following a 15.1 percent increase in sales in June, this significantly better-than-expected result brought new home sales to their highest level since December 2006. This report, combined with the positive results for existing home sales during the month, highlights the very impressive rebound made by the housing sector over the past few months. A major bright spot in the economic recovery, housing has been boosted by record low mortgage rates and shifting consumer preferences in the face of the pandemic.
On Wednesday, the preliminary estimate of July’s durable goods orders report was released. Durable goods orders impressed, rising by 11.2 percent during the month against forecasts for a 4.8 percent increase. Much of this result was due to a rebound in volatile transportation orders, as core durable goods orders, which strip out the impact of transportation orders, grew modestly by 2.4 percent against calls for a 2 percent rise. Core durable goods orders are often used as a proxy for business investment, so July’s positive result was encouraging. It indicates that businesses continued to spend during the month, despite potential headwinds created by rising case counts. Following this report, the level of core durable goods orders is almost back to pre-pandemic levels, indicating that the recovery in business investment has been largely V-shaped.
Thursday saw the release of the second estimate of second-quarter GDP growth. The economy contracted at an annualized rate of 31.7 percent during the quarter, slightly better than the advanced estimate of a 32.5 percent annualized contraction. Nonetheless, this result represents the worst quarter for economic growth in modern history, far surpassing the 8.4 annualized decline we saw in the fourth quarter of 2008. The steep drop in economic output was driven by collapsing personal consumption during the quarter, which was down a record 34.1 percent on an annualized basis. These figures are certainly concerning, but it’s important to note that this data looks backwards. Economists anticipate a double-digit rebound in GDP growth in the third quarter, which should partially offset the damage created by anti-coronavirus measures in the second quarter.
Thursday also saw the release of the weekly initial jobless claims report for the week ending August 22. There were 1.006 million initial unemployment claims filed during the week, a result largely in line with the expected 1 million initial filers. The numbers are down modestly from the roughly 1.1 million initial claims the week before, but above the recent low of 971,000 initial claims for the week ending August 8. While initial claims have certainly improved after spiking to more than 6.8 million toward the end of March, claims remain stubbornly elevated on a historical basis, and that’s cause for concern. Continuing unemployment claims, which are reported with a one-week lag, also disappointed, falling from 14.758 million to 14.535 million, against calls for a larger decline to 14.4 million. As is the case with initial claims, continuing claims remain very high on a historical basis, highlighting the headwinds that the job market is facing despite the reopening efforts we’ve seen this summer.
On Friday, July’s personal income and personal spending reports were released, with both beating expectations. Spending went up 1.9 percent against calls for a 1.6 increase, while income rose by 0.4 percent against calls for a 0.2 percent decline. The spending growth helped calm concerns that rising case counts and falling consumer confidence could lead to a more significant slowdown in July spending after strong growth in May and June. That said, it certainly appears as if the tailwind from reopening efforts is beginning to fade. Accordingly, the next few months of consumer spending data will be closely monitored, given the importance of consumer spending to the overall economy. The income growth seen in July was encouraging, as it showed that rising wage income was more than enough to offset a fall in government stimulus. Looking forward, the expiration of the additional $600 weekly unemployment benefit at the end of July will likely serve as a headwind for income growth. Still, a high consumer saving rate could help support further spending growth if income growth falters.
Finally, we finished the week with the second and final reading of the University of Michigan consumer sentiment survey for August. Consumer sentiment improved, rising from 72.8 mid-month to 74.1 at month-end, against expectations to remain flat. This result represents a modest increase from July’s 72.5 reading and better results than expected compared with initial estimates for a decline to 72. Nonetheless, the index still sits below the post-reopening high of 78.1 it hit in June and is a far cry from the pre-pandemic high of 101 set in February. As was the case with the Conference Board Consumer Confidence Index for August, this report highlighted the very real work that must be done before confidence returns to pre-pandemic levels.
What to look forward to
On Tuesday, the ISM Manufacturing index for August will be released. This measure of manufacturer confidence is set to rise modestly from 54.2 in July to 54.5 in August. This result would bring the index to its highest level since March 2019, highlighting an impressive rebound in manufacturer sentiment that we saw once reopening efforts kicked off in May. This is a diffusion index, where values above 50 indicate expansion, so its continued improvement in August would be a good sign for manufacturing output in the third quarter. Still, despite the anticipated increase for manufacturing confidence, output remains roughly 8 percent below pre-pandemic levels, demonstrating the work that needs to be done here.
On Thursday, the initial jobless claims report for the week ending August 29 is set to be released. Economists expect to see 978,000 initial claims during the week, which would be an improvement from the 1.006 million initial claims from the prior week but above the recent low of 971,000 recorded for the week ending August 7. Initial claims have bounced around the level of 1 million per week throughout August, highlighting the very real headwinds the job market faces despite the boost from reopening efforts earlier in the summer. Continuing claims are also expected to show modest improvement, but they will remain elevated on a historical basis. We’ll continue to monitor these weekly reports until initial and continuing claims return to more normal levels.
Thursday will also see the release of July’s international trade report. The trade deficit is expected to widen, from $50.7 billion in June to $52.7 billion in July, following a similar expansion of the trade deficit for goods previously reported for July. Imports and exports of goods both increased by 11.8 percent in July, after trade volumes hit multiyear lows at the height of the global pandemic. July’s rebound in goods-related trade was primarily driven by increasing motor vehicle trade, with both exports and imports of cars increasing by more than 40 percent, which brought this segment close to pre-pandemic levels. While the trade of goods has shown a solid recovery since reopening efforts began, service-related trade has been slower to bounce back, primarily due to lowered international travel during the pandemic.
The third major data release on Thursday will be the release of the ISM Services index for August. Economists expect to see service sector confidence decline from 58.1 in July to 57.4 in August. As was the case with manufacturing confidence, service sector confidence has shown a strong rebound since reopening efforts began, so this anticipated decline is nothing to worry about. In fact, if estimates hold, the index would sit at its second-highest level this year, behind July’s stronger-than-anticipated result. This is another diffusion index, where values above 50 indicate expansion, so the index would still point toward continued growth if estimates prove accurate. The strong rebound in business confidence that we’ve seen since May has been very encouraging, indicating that business owners have largely viewed reopening efforts as a success. Nonetheless, we’ll have to wait and see whether confidence can remain high now that the tailwind from reopening efforts is starting to fade.
Finally, we’ll finish the week with Friday’s release of the August employment report. Economists expect to see just over 1.5 million jobs added in August, following the more than 1.75 million jobs added in July. The unemployment rate is also set to show improvement, with forecasts calling for a decline from 10.2 percent in July to 9.8 percent in August. While adding roughly 1.5 million jobs in August would certainly be a positive development, it’s important to view this release in context, as we lost more than 22 million jobs between March and April alone. Despite the progress made in getting people back to work, the fact remains that even if we do see an additional 1.5 million jobs in August, it would leave us with less than 11 million hires between May and August. That figure represents a substantial gap compared with pre-pandemic employment levels. Ultimately, a full economic recovery will require significant improvements on the employment front, so these monthly releases will continue to be closely monitored.
That’s if for this week—thanks for reading and stay safe!