US Michigan Consumer Sentiment August Preview: Looking ahead

American consumer sentiment is predicted to be stuck at the bottom of its pandemic range as the rising Covid caseload in several states has undermined hopes for a quick economic recovery.   

Michigan consumer sentiment is expected to fall to 72 in July from 72.5 in June and 78.1 in May.  The pandemic low was in April at 71.8.

Michigan consumer sentiment

However, better than forecast payrolls in July and a 32% drop in initial jobless claims in the three weeks to August 7 may have mitigated the damage to consumer attitudes brought on by the surge in viral diagnoses.

Initial jobless claims and non-farm payrolls

Jobless claims jumped 10% in mid-July, from 1.307 million in the week of July 10 to 1.435 million on July 24.  This was coincident with the second wave of Covid cases in a number of states from early June, particularly the large economies of California, Texas and Florida.  Some states, Texas included, rescinded or delayed parts of their opening plans.  Markets linked the two events and assumed the reviving virus was impairing or halting recovery from the pandemic closures of March and April. 

The higher rate of unemployment claims in the middle weeks of July had been expected to continue into month end with a 1.415 million forecast.  In fact claims fell 17% to 1.191 million on July 31. The following week, August 7, claims were projected to fall to 1.120.  Instead they dropped 19.1% to 0.963 million, their lowest level of the Covid era.

It now is clear that the mid-July rise in jobless claims was limited in time and amount.  Claims have dropped 32.9% in two reports, from 1.435 million the July 24 week, to 0.963 million on August 7.  

Initial jobless claims

The rise in initial claims was thought to presage a steep drop in rehiring. Non-farm payrolls were expected to drop by two-thirds from 4.8 million in June to 1.6 million in July.  The presumption being the expected economic impact of the second wave of Covid diagnosis.  The effect of the opening restrictions turned out to be overstated. Payrolls added 1.763 million workers 10% more than expected.

Of the 22.16 million workers who lost their jobs by the non-farm payrolls count in March and April, 42% 9.253 million have been rehired by the end of July.

CPI and retail sales

Consumer inflation rose twice as fast as expected in July.  Overall CPI climbed 0.6%, as it did in June, double the 0.3% forecast.

Core inflation was also 0.6% higher on the month, three times the June rate and the July forecast.

Core CPI, m/m

Higher consumer inflation implies steady or rising demand.  When companies have to choose between higher prices and lower sales or steady prices and status quo or rising sales they invariably choose the latter.   Prices would not be rising if purchases were falling.  

Annual inflation rates have not yet fully recovered from the shutdown plunge in demand.

The headline rate was 1% in July, less than half its February rate of 2.3%. The core yearly rate was 1.6% in July, two-thirds of its February rate.

Retail sales are expected to rise 1.9% in July, less than one-third of the June 7.5% gain. Combined with May’s 18.2% sales in the two months jumped 25.7% more than recovering the 22.9% lockdown collapse of March and April. The forecasts for May and June posited just 13% over the two months, half the actual increase.

Purchases in the control group category which is the Bureau of Economic Analysis’ consumption component, are forecast to rise 0.8% in July after June’s 5.6% and May’s 10.1% increases. Purchases dropped 12.4% in April 12.4% and rose 3.2% in March.

A substantial improvement in jobless claims, and good payrolls and rising CPI in July infer a better retail sales number than the current estimate of 1.9%.         

Conclusion and the dollar

Non-farm payrolls and the second half improvement in jobless claims suggest that the labor markets continued to hire in July and August.  The month’s CPI rate implies steady or rising consumer demand. 

Employment is the most important component of consumer confidence. The July drop in sentiment was, given the actual job and inflation numbers, quite possibly more a product of the fear of the second wave and the incessant and often misleading media coverage, than a measure of genuine economic impact. 

Now that the second wave seems to be receding in most states a revival in consumer confidence appears a more than modest bet.

The month old sell-off in the US dollar has been prompted by the assumed negative impact of the second Covid wave the American economy.  If the total effect is a two week jump in initial claims and a one month drop in consumer sentiment, markets will shortly have to find a different scenario for the USD.