Durable Goods Orders
Orders rose 11.2% in July, but just like June, it was fueled predominately by the demand for new cars and trucks. When we exclude transportation, new orders rose 2.4%. Orders for autos and parts rose 22%, which was down modestly from the 24% growth we saw in June. Now that auto manufacturing is back to pre-pandemic levels, growth in durable goods orders should slow significantly. I also find it hard to believe that auto sales do not slow with credit tightening and 27 million unemployed.
Orders are now down 3.3% year to date, while nondefense capital goods orders excluding aircraft, otherwise known as business spending, is down 1.9%.
The index for consumer confidence fell to a six-year low in August. This is more bad news for consumer spending as we move forward, which isn’t surprising considering the deterioration in the labor market and the end of the enhanced unemployment benefits one month ago. Expectations were that this index would rise to 93.0 rather than decline to 84.8. The gauge that measures the six-month outlook also fell to a new pandemic low of 85.2.
Personal Income and Spending
The rate of personal spending growth continued to slow in July, rising 1.9% from June, which was due in part to the resurgence of the coronavirus in many southern states, as well as the approaching end of enhanced unemployment benefits. I expect we will see a decline in spending in August, as the economy fell over the income cliff, leaving some 27 million workers with nothing more than state unemployment benefits. That is not a living wage.
Personal income rose 0.4% in July after two months of declines, which was mostly due to an increase in employee compensation, resulting from the reopening of many state economies.
Initial claims continue to hover around one million a week, which is pathetic at this stage of the supposed economic recovery. The unadjusted number of claims fell to a more market-friendly 821,591, which was below one million for the fourth week in a row, but we can’t leave out the self-employed or gig workers who have been hit just as hard. There were more than 600,000 of these workers filing initial claims, which brings the total to 1.43 million last week. This is a slight increase from the prior week.
The total number of continuously unemployed fell modestly to 27.2 million as of August 8. This is a staggering number of workers who are no longer receiving enhanced benefits. While President Trump authorized a new payment of $300 per week, it could be a month before these workers see the enhanced benefit, and the funds available for this program will only last three weeks.
Given the income cliff that Congress sent the economy over last month, the high-frequency economic statistics for August should be ugly. I expect income and consumption to decline, consumer confidence to continue falling and a renewed deterioration in the labor market to begin as a result of the drop in consumer spending. We are already starting to see a new wave of corporate layoffs in the service industry as many companies right-size for the new post-pandemic economy.
The growing divergence between the financial markets and the real economy has got to be close to a tipping point.
The markets are being overstimulated, while the economy is not being stimulated enough, and at some point, the two must converge. The markets have benefited in the short term from the deterioration in the labor market, because the reduction in labor costs allowed companies to exceed earnings expectations. That will be difficult to repeat as we move forward, especially when the decline in consumption due to the loss of jobs starts to impact the corporate revenues in what is still a consumer-based economy.
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Additional disclosure: Lawrence Fuller is the Managing Director of Fuller Asset Management, a Registered Investment Adviser. This post is for informational purposes only. There are risks involved with investing including loss of principal. Lawrence Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Fuller Asset Management. There is no guarantee that the goals of the strategies discussed by will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any particular security.