Consumers lead. Businesses catch up.
Today's data on retail sales and industrial production in July again show a solid economic recovery. It's onward and upward, albeit a bumpy ride.
An eternal truth in the U.S. economy is ‘Customer is Queen.’ Their spending is 70% of GDP. Consumers came back strong this spring and businesses are catching up.
It’s not surprising we have had bottlenecks like labor shortages and inflation. Businesses were not ready for consumers to come back in force so quickly. Hiring takes time and many workers weren’t ready to come back due to no childcare or unsafe workplaces. Nonetheless, job gains have been impressive recently, taking some pressure off. Inflation should continue to step down, but so might wage growth.
Why did consumers come back ‘fast and furious’ even as millions remained out of work? Quite simply, Congress put a lot of money in people’s pockets: nearly $1 trillion dollars in three stimulus checks. A family of four got $11,400 during the first year of the crisis, which is about one fifth of median family income. Wow! Relief worked. And, above all, we got the vaccine, making it much safer to go out and spend.
So while sales at retailers and restaurant declined one percent in July, it’s holding at a level of spending well above the pre-pandemic trend. Consumers are back big time.
And there’s a lot going on ‘under the hood.’ Motor vehicle and parts dealers, which are contributing a lot to inflation lately, had sales shoot up this spring and are cooling some now. Sales of other goods like clothing and electronics have risen less but are still strong.
As I have said many times, Covid-19 has been in the driver seat of this crisis from the start and will be to its end. The effects of shutdowns and re-opening are clear in the sales at groceries, restaurants, and the gas pump.
Of course, consumers can only consume stuff that exists. Many manufacturers of consumer goods have struggled to get everything they need to produce. A big part of these “supply chain” problems stem from Covid-19 hitting countries in Southeast Asian hard where key inputs like semi-conductors are produced. At the same time American consumers demanding lot more goods each month put immense pressure on global shipping networks. Overall, conditions appear to be on the mend.
Industrial production of total consumer goods rose one percent in July, bringing it back to pre-pandemic levels. Motor vehicles producers jumped noticeably, though it’s been volatile lately. Sustained production would help take pressure of inflation.
Consumer spending is no longer rising at a break-neck speed, but the level remains really high. We also see businesses catching up to that demand, whether it’s hiring or manufacturing. Yes, it’s a bumpy ride; millions of people are still struggling; and the pandemic is not under control. That said, we are pointed in the right direction.
What to Watch
Fed Chair Jay Powell will meet virtually with econ teachers and students today. Of course, the news media is hoping he might give hints about “tapering,” that is, when the Fed starts to slow its asset purchases. That’s akin to them taking their foot of the accelerator. THIS IS AN EVENT ABOUT OUR NEXT GENERATION NOT SOME NEAR MEANINGLESS FED ACTION. PRIORITIES, PEOPLE!
Voices of #EconTwitter
Child Tax Credit, which is essentially Universal Basic Income for Kids, is providing economic relief to families and spending on their children. Congress should extend the program and allocate more money to get the money to every child.
Wide-ranging, super interesting conversation: Arthur Turrell from Big data to agent-based modeling to nuclear fusion. Wow. And he’s a great guy. If you are interested in macro, listen to MacroMusings with David Beckworth each Monday.