Monday Update (on Tuesday): Personal Spending Beats Expectations in August

Posted by Sam Millette

October 5, 2021


In his Monday Update, Commonwealth’s Sam Millette analyzes news on durable goods orders, confidence, the jobs market, international trade, and more.Last week saw a number of important economic updates, with a focus on durable goods orders, consumer and manufacturer confidence, and August personal income and spending. Durable goods orders and personal spending were highlights, as both increased by more than expected in August. This will be another busy week for updates, with news on international trade, service sector confidence, and September employment to come.

Last Week’s News

On Monday, the August durable goods orders report was released. Headline durable goods orders increased by more than expected, going up by 1.8 percent against calls for a 0.7 percent increase. This result was largely driven by a rise in volatile commercial aircraft orders. Core durable goods orders, which strip out the impact of transportation orders, increased by 0.2 percent against forecasts for a 0.5 percent gain. Core durable goods orders are often viewed as a proxy for business investment, so the continued growth in August was welcome despite the miss against expectations. Furthermore, following the 0.8 percent increase in core durable goods orders seen in July, this report marks six consecutive months with core orders growth. Overall, the August report was relatively encouraging. It showed that businesses continue to spend and invest, which is a good sign for overall economic growth in the month and quarter.

On Tuesday, the Conference Board Consumer Confidence Index for September was released. Confidence fell by more than expected, dropping from an upwardly revised 115.2 in August to 109.3 in September. The forecasts were for a more modest decline to 115. Both the present situation and future expectations subindices declined by more than anticipated, which led to the larger than expected drop in headline confidence. Still, although the decline was slightly disappointing, the index sits well above the 2021 low of 87.1, recorded in January when the third wave of infections weighed heavily on confidence. When compared with confidence levels during earlier waves of the pandemic, September’s relatively high result indicates consumer confidence has become more resilient to rising medical risks. Historically, higher levels of consumer confidence have supported faster consumer spending growth, so current confidence levels may support continued spending growth. We saw this effect in August when retail sales and personal spending beat expectations, despite lower confidence levels during the month.

On Thursday, the initial jobless claims report for the week ending September 25 was released. The report showed that initial unemployment claims increased from 351,000 the week before to 362,000. Forecasts were for a decline to 330,000. This report marks three straight weeks with increasing initial jobless claims. Claims remain near their pandemic-era low of 312,000, however, which we saw at the start of September. The recent increase in initial jobless claims is partially due to rising claims in California. There, the expiration of enhanced federal unemployment benefits at the start of the month likely caused more Californians to file for the state’s unemployment program. This situation provides a good reminder that initial jobless claims data can be quite volatile week-to-week, as it relies on reports from each of the 50 states. Overall, given the progress made this year in lowering initial claims and the potential for week-to-week reporting volatility, the recent modest uptick in claims is not overly concerning.

Friday saw the release of the August personal income and spending reports. Spending beat expectations for the month, going up by 0.8 percent against calls for a 0.7 percent rise. Echoing the better-than-anticipated result for retail sales growth in August, this encouraging report indicated that consumers remained willing and able to spend despite lowered confidence levels. Personal income increased by 0.2 percent in August, which was in line with expectations. Personal income has been very volatile on a month-to-month basis throughout the pandemic, as shifting federal stimulus and unemployment payments have led to large monthly swings in average income. Looking forward, labor shortages and high levels of job openings should support continued wage growth, as well as faster spending growth.

We finished the week with Friday’s release of the ISM Manufacturing index for September. This widely monitored gauge of manufacturer confidence improved by more than expected, rising from 59.9 in August to 61.1 in September. The calls were for a decline to 59.5. This is a diffusion index, where values above 50 indicate expansion, so this result indicates faster expansion for manufacturers. The index now sits at a four-month high, continuing to remain well above pre-pandemic levels, as has been the case since the expiration of initial lockdowns last year. This strong report signals that the manufacturing recovery continues in earnest despite headwinds created by tangled supply chains and rising costs. High levels of consumer demand are expected to support continued manufacturing growth in the months ahead, boding well for overall economic growth.

What to Look Forward To

On Tuesday, the August international trade report was released. The report showed that the trade deficit widened by more than expected during the month. It increased from a upwardly revised $70.3 billion in July to $73.3 billion in August, against calls for a more modest increase to $70.8 billion. This result marks a new record monthly deficit, breaking the previous record of $73.2 billion set in June. The widening of the deficit was caused by a 1.4 percent surge in imports, which was more than enough to offset a 0.5 percent increase in exports. Imports have grown notably throughout the course of the year, driven in large part by high levels of pent-up consumer demand for goods and services in the spring and early summer. Exports have been slower to recover due to tangled supply chains and the uneven nature of the global economic recovery.

Tuesday will also see the release of the ISM Services index for September. This gauge of service sector confidence is expected to decline slightly, from 61.7 in August to 59.8 in September. This is another diffusion index, where values above 50 indicate expansion. So, if estimates prove accurate, this report would indicate continued expansion for the service sector. The service sector accounts for a large majority of overall economic activity in the country. Accordingly, even if the index falls modestly in September, the result would be a good sign for overall economic growth during the month and quarter. As was the case with manufacturer confidence, service sector confidence has remained well above pre-pandemic levels since the lifting of initial lockdowns last year. In the months ahead, service sector confidence is expected to remain at levels that support continued growth.

We’ll finish the week with Friday’s release of the September employment report. Economists expect to see 513,000 jobs added during the month. This result would be a notable increase from the 235,000 jobs added in August but below the recent high of 1,053,000 jobs gained in July. We saw a steady acceleration in job growth between April and July of this year, driven by easing restrictions at the state and local levels. In August, however, rising medical risks led to a slowdown in hiring. We saw medical risks start to decline in September, so a return to more robust job growth during the month would be a welcome sign that the August slowdown was transitory. The underlying data should also show improvements, as the unemployment rate is expected to drop from 5.2 percent in August to 5 percent in September. This figure would represent the lowest unemployment rate since the start of the pandemic, demonstrating that the labor market recovery picked up steam in September.

That’s it for this week—thanks for reading!


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