Consumer Spending Looks Strong Despite Pandemic

Economic Report Monitor #59
August 14th, 2020

Retail sales in July confirmed what most people were expecting. The economic recovery has slowed with a resurgence of COVID-19 cases stalling reopening processes. Overall, sales increased just 1.2% after they surged 8.4% in June and failed to meet expectations of 2.3% that economists surveyed by Dow Jones suggested. Despite growth being muted in July, sales for the first 7 months of 2020 are down just -2.1% from the same period in 2019. Excluding motor vehicles & parts and gasoline stations, that number is actually 0.2% higher.

From CNBC

Motor vehicles & parts also dragged July retail sales lower with a -1.2% drop for the month. Retail sales without that category were 1.9% and closer to expectations. Building material & garden equipment & supplies dealer also dragged sales with a -2.9% drop itself. Furniture stores were flat at 0.0%. These numbers might point to further pain for durable goods categories which was most intense at the beginning of the pandemic. A combination of resurging COVID-19 cases and the cooldown of direct stimulus payments is probably to blame.

On the other hand, food services & drinking places and clothing & clothing accessories stores saw nice gains of 5.0% and 5.7%. These categories which were most impacted by the lockdowns are still feeling the benefits of reopening but are still well off of pre-COVID-19 levels. They're down -18.9% and -20.9% respectively. Electronic & appliance stores have fared much better, up 22.9% in July and only down -2.8% on the year. One thing is true. If stores are open for business, then consumers will be more than willing to spend, especially when they're flush with government stimulus cash. The important question is how long will it be until restrictions are completely lifted.

The June report on inventories also points to strength in consumer spending where business inventories were reported -1.1% lower than the month before and -5.8% lower than a year ago. Retail inventories dropped even harder, -2.6% lower than the month before and -11.6% lower than a year ago. The inventories/sales ratio for retail dropped to 1.23x, down from 1.46x a week ago with motor vehicles again dragging the data point down (ratio fell from 2.30x a year ago to 1.57x in June).

This differs from wholesale and manufacturer inventories which have built compared to sales, unlike retail. The wholesale inventory/sales ratio was 1.38x, slightly higher than 1.34x a year ago, and manufacturers' ratio was 1.51x, a good bit higher than 1.38x a year ago. These ratios have increased despite sales growing faster in these two categories over retail. There are a number of possible explanations for the inventory build, and the most likely is that aggressive reopening processes in June lead manufacturers and wholesalers to believe that a strong rebound would be expected. Further inventory builds may be coming as this view now appears misguided.

Other Reports:

• Productivity increased 7.3% in 2020 Q2 as output fell -38.9% and hours worked fell -43.0%. Hourly compensation jumped 20.4% with unit labor costs up 12.2%.
• Industrial production increased 3.0% in July with consumer goods up 4.6% and 5.0%. Construction was up just 0.4%. Capacity utilization is 70.6% which is -6.3% below Feb.
• UMich consumer confidence early August report was mostly flat at 72.8, up just 0.4%. Current conditions index down -0.4% and expectations up 0.9%.