AIER’s Leading Indicators Index fell for a fifth consecutive month in August, falling to 58 from 75 in July. The index was at 92 in March. While August marks the twelfth consecutive month above the neutral 50 level, it is also the lowest reading of the past year and the lowest since August 2020 when the index was just 21. The string of declines is raising the likelihood that breadth of growth could narrow in the future. For now, the August result remains slightly above neutral and suggests continued economic expansion in coming months, but caution is recommended.
The Roughly Coincident Indicators index held at 100 for a sixth consecutive month in August. The continued strength of the roughly coincident indicators is a positive sign for the current expansion but given the deteriorating strength of the Leading Indicators Index, some setbacks for the Roughly Coincident Indicators Index over the coming months would not be surprising. The Lagging Indicators Index held at a below-neutral 33 for the fourth consecutive month (see chart).
Cessation of restrictive government lockdown policies and reopening of the economy have been the driving forces behind the economic recovery but the resurgence in Covid cases is a growing headwind and is compounding difficult labor conditions, shortages of materials, and lingering logistical issues. These issues continue to exert upward pressure on prices. Furthermore, outbreaks of the Delta variant of the Coronavirus are having an impact on consumers and could lead to some partial reinstatement of government restrictions. Risks to the outlook have grown significantly, but for now, continued economic expansion remains the likely path.
Leading Indicators Index Drops for the Fifth Consecutive Month
The AIER Leading Indicators index posted its fifth consecutive drop in August, coming in at 58 versus 75 in July. The 17-point decline was the largest since May 2020 and leaves the index well below the recent high of 92 in March. The August result remains slightly above the neutral 50 threshold and suggests continued economic expansion in the months ahead. However, the string of declines also suggests that sources of growth will likely start to narrow in coming months.
Among the 12 leading indicators, six were in a positive trend in August with four trending lower and two trending flat or neutral. Three of the 12 leading indicators changed direction in August. Total heavy truck unit sales, a measure of capital investment, fell to a negative trend from a positive trend in July. This indicator has been unusually volatile in recent months. Real new orders for core capital goods, a broader measure of capital investment and another of the AIER leading indicators, remains in a positive trend.
The average workweek in manufacturing fell from a positive trend to a neutral trend. This indicator had staged a solid recovery from the lockdown-induced plunge in 2020, reaching 41.7 hours in March 2021 and matching the result from February 2020 prior to the lockdowns (though this was still below the average of 42 hours in 2018). Since the March peak, average weekly hours in manufacturing have shown some weakness. That weakness may be related to shortages of materials that limit production or due to the resurgence of Covid.
The University of Michigan Consumer Expectations index was the third indicator to change in August, dropping from a positive trend to a neutral trend. The drop was both severe in magnitude and broad in coverage (see more below). The drop was entirely attributable to the fears associated with the resurgence in Covid cases.
Three other leading indicators continued to show unfavorable trends: the Treasury yield spread, real new orders for consumer goods, and housing permits. The Treasury yield spread has been unfavorable for 20 months while the real new orders for consumer goods indicator has been unfavorable for four consecutive months and housing permits for two consecutive months.
Overall, the Leading Indicators index posted a sharp drop in August but remained slightly above the neutral 50 level. It was the twelfth consecutive month above 50 but the lowest level of the past year. The results suggest continued expansion is likely but the breadth of sources of growth are likely to narrow in coming months, especially if new Covid cases run rampant. Over the last 12 months, the leading indicators index has averaged 77.1 but the 34-point drop over the last five months from the recent high of 92 in March is a cautionary sign. As government policies restricting consumers and businesses have been removed, economic activity has rebounded. However, ripple effects from the lockdowns continue to disrupt labor supply, production, and logistics and transportation, resulting in scattered shortages of input materials and rising pressure on prices. These issues are likely to be resolved over time (though rising new Covid cases may delay the resolution) and are unlikely to result in a 1970s-style price spiral.
The Roughly Coincident Indicators index held at a perfect 100 reading in August with all six individual Roughly Coincident indicators continuing to trend higher. The sixth consecutive month of perfect results follow four months of readings in the 83 to 92 range. The Roughly Coincident Indicators index has been above the neutral 50 level for eleven consecutive months, posting an average reading of 91, the highest since May 2019. The strong performance of the Roughly Coincident Indicators index since the government-induced recession of 2020 reflects the broad nature of the economic recovery but the recent weakness in the Leading Indicator Index raises the likelihood of some setbacks for the Roughly Coincident Indicators Index in coming months.
AIER’s Lagging Indicators index was unchanged for a fourth consecutive month in August, maintaining a weak 33 reading, well below the neutral 50 level. August was the 20th consecutive month at or below neutral. The average over the last 20 months is 28.8. Overall, four indicators remained in an unfavorable trend, while two indicators had favorable trends, and none were in a neutral trend.
Fears of Delta Variant Send Consumer Sentiment Plunging in Early August
The preliminary August results from the University of Michigan Surveys of Consumers show overall consumer sentiment plunged in early August, hitting the lowest level since December 2011. Fears of the Delta variant and rising number of new Covid cases were the primary drivers.
According to the report, “Consumers reported a stunning loss of confidence in the first half of August. The Consumer Sentiment Index fell by 13.5% from July, to a level that was just below the April 2020 low of 71.8. Over the past half century, the Sentiment Index has only recorded larger losses in six other surveys, all connected to sudden negative changes in the economy: the only larger declines in the Sentiment Index occurred during the economy’s shutdown in April 2020 (-19.4%) and at the depths of the Great Recession in October 2008 (-18.1%).”
The report goes on to add, “The losses in early August were widespread across income, age, and education subgroups and observed across all regions. Moreover, the losses covered all aspects of the economy, from personal finances to prospects for the economy, including inflation and unemployment.”
With regard to the economic outlook, the report adds, “There is little doubt that the pandemic’s resurgence due to the Delta variant has been met with a mixture of reason and emotion. Consumers have correctly reasoned that the economy’s performance will be diminished over the next several months, but the extraordinary surge in negative economic assessments also reflects an emotional response, mainly from dashed hopes that the pandemic would soon end. In the months ahead, it is likely that consumers will again voice more reasonable expectations, and with control of the Delta variant, shift toward outright optimism.”
Overall consumer sentiment decreased to 70.2 in early August, down from 81.2 in July, a 13.5 percent drop. From a year ago, the index is down 5.3 percent. The current-economic-conditions index sank to 77.9 from 84.5 in July. That is a 7.8 percent decline and leaves the index with a 6.0 percent decrease from August 2020. The second sub-index — that of consumer expectations, one of the AIER leading indicators — plunged 13.8 points or 17.5 percent for the month to 65.2, the lowest since October 2013.
The shocking decline in consumer sentiment in early August reflects the emotional sensitivity of the population to the spread of the Delta variant and the sharp rise in new Covid cases. Emotions do play a role in consumer behavior and therefore consumer spending.
Covid Concerns and Rising Prices Drag Consumer Confidence Down in August
The Consumer Confidence Index from The Conference Board fell in August, dropping 11.3 points to 113.8. August was the second decline in a row and puts the index at its lowest level since February 2021.Both major components of the index fell for the month. The present-situation component decreased 9.9 points to 147.3, the lowest since April, while the expectations component lost 12.4 points, taking it to 91.4, the lowest since January. The details of the report suggest that consumers are becoming more concerned about the rising number of Covid cases and, to a lesser extent, rising prices.
According to the report, “Spending intentions for homes, autos, and major appliances all cooled somewhat; however, the percentage of consumers intending to take a vacation in the next six months continued to climb.” However, the report adds, “While the resurgence of COVID-19 and inflation concerns have dampened confidence, it is too soon to conclude this decline will result in consumers significantly curtailing their spending in the months ahead.”
The most significant declines in the details of the survey came from views of current and future business conditions as well as expectations for income. Regarding current general business conditions, the percentage of consumers saying present business conditions were good fell 4.7 points to 19.9 while the percentage of those saying business conditions were bad rose 4.0 percentage points to 24.0. Those results left the net business conditions percentage at -4.1, down 8.7 from the prior month.
Regarding consumer expectations, consumers’ expectations for business conditions in six months, the percentage expecting better conditions fell 8.0 points to 22.9 while the net percentage expecting worse conditions rose 5.9 points to 17.8. The net percentage for business conditions six months ahead was down 13.9 points to 5.1.
Expectations for future income deteriorated with 17.9 percent expecting an increase, down from 20.0 in July, while 10.1 percent expect a decrease, up from 8.8 in July. Those results put the net percentage at 7.8 percent, down 3.4 points from 11.2 in July. As noted earlier, future buying plans softened as percentages for buying a home, auto, or major appliance all fell in the latest month though the percentage planning a vacation rose.
Overall, the survey results suggest consumers are growing more concerned about the recent surge in new Covid cases.
Total and Core Retail Sales Fell in July
Retail sales and food-services spending fell 1.1 percent in July, the second drop in the last three months. The three-month annualized growth rate is -6.8 percent though the level of sales is still well above the most recent nine-year trend. From a year ago, total retail sales are up 15.8 percent.
Core retail sales, which exclude motor vehicle dealers and gasoline retailers, posted a 0.7 percent decline for the month, leaving that measure with a -0.1 percent annualized growth rate but a 13.8 percent gain from a year ago. Core retail sales are still well above the nine-year trend.
Most categories were down in July with eight posting drops and five showing gains. The gains were led by a 3.5 percent increase in miscellaneous store retailers, followed by gasoline stations (up 2.4 percent for July), and restaurants (up 1.7 percent). Restaurants is the only category to have a gain in each of the last four months (see second chart).
Among the eight categories showing drops in July, motor vehicles and parts dealers were down 3.9 percent, nonstore retailers (primarily online sellers) fell 3.1 percent, clothing and accessory retailers decreased by 2.6 percent, and sporting goods, hobby, musical instruments and book stores lost 1.9 percent.
Overall, retail sales posted a weak result in July, the second drop in the last three months, but remain well above trend.
Unit Auto Sales Fell Again in August as Shortages Drive Inventory Down and Prices Up
Sales of light vehicles totaled 13.1 million at an annual rate in August, down from a 14.6 million pace in July. The August result was the fourth consecutive decline and third straight month below the 16 to 18 million range. Falling auto sales is largely a result of component shortages that have limited production, resulting in plunging inventory and surging prices.
Breaking down sales by origin of assembly, sales of domestic vehicles fell to 9.8 million units versus 11.0 million in July, a drop of 10.7 percent, while imports fell to 3.27 million versus 3.66 million in July, a drop of 10.5 percent. The domestic share came in at 74.9 percent in August versus 75.0 in July.
Component shortages, especially computer chips, have disrupted production for most manufacturers, creating a scarcity for many models, leading to lower inventory and higher prices. Ward’s estimate of unit auto inventory came in at 151,400 in July, the lowest on record. The Bureau of Economic Analysis estimates the inventory-to-sales ratio has fallen to a record low 0.683 for July.
The plunging inventory levels are pushing prices higher. The average consumer expenditure for a car was $30,729 in July while the average consumer expenditure on a light truck rose to $46,058. The July levels represent 12-month gains of 13.3 percent and 11.7 percent, respectively.
As a share of disposable personal income per capita, average consumer expenditures on a car jumped to 56.4 percent versus just 41.6 percent in March 2021 while the average consumer expenditure on a light truck as a share of disposable personal income per capita jumped to 84.6 percent versus 64.5 percent as recently as March 2021.
Covid Resurgence Hurts Recovery in Employment
U.S. nonfarm payrolls added 235,000 jobs in August, the third slowest of the 16-month recovery. The gain follows the addition of 1.053 million in July and 962,000 in June. Still, the August gain is the eighth in a row and 15th in the last 16 months, bringing the eight-month gain to 4.687 million and the 16-month post-plunge recovery to 17.029 million. This is still well below the 22.362 million combined loss from March and April of 2020, leaving nonfarm payrolls 5.333 million below the February 2020 peak.
Private payrolls posted a 243,000 gain in August after a 798,000 gain in July and 808,000 increase in June. The August rise in private payrolls is also the eighth in a row and 15th in the last 16 months. The August addition brings the eight-month gain to 4.098 million and the 16-month recovery to 16.810 million versus a combined loss of 21.353 million in March and April of 2020, leaving private payrolls 4.543 million below the February 2020 peak.
Weakness in August was concentrated in the Retail industry and Leisure and Hospitality industry. Within the 243,000 gain in private payrolls, private services added 203,000 while goods-producing industries added 40,000 versus a monthly average of 585,500 over the prior six months for services and 36,667 for goods.
Within private service-producing industries, retail lost 28,500 jobs in August, the third decline in the last five months while leisure and hospitality was unchanged for the month after adding 415,000 in July and an average of 349,833 per month over the prior six months. Among other service industries, business and professional services added 74,000 in August, transportation and warehousing gained 53,000, and education and health care services increased by 35,000 (see second chart).
Within the 40,000 gain in goods-producing industries, construction was down 3,000, while durable-goods manufacturing increased by 31,000, nondurable-goods manufacturing added 6,000, and mining and logging industries increased by 6,000.
After 16 months of recovery, only one of the major private industry groups has more employees than before the government lockdowns – transportation and warehousing. Two industries – Leisure and hospitality (down 917,000 jobs), education and health services (down 687,000) – are down more than half a million jobs each. On a percentage basis, the losses are more evenly distributed. Three of the 14 private industries shown in the report have declines of 5 percent or more since February 2020. Leisure and hospitality leads with a 10.0 percent drop since February 2020, mining and logging comes in second with a 6.7 percent loss followed by information services at 5.1 percent. For the labor market as a whole, total nonfarm payrolls and private payrolls are down 3.5 percent since February 2020.
Average hourly earnings rose 0.6 percent in August, putting the 12-month gain at 4.3 percent. The average hourly earnings data should be interpreted carefully, as the concentration of job losses and recovery for lower-paying jobs during the pandemic distorts the aggregate number.
The average workweek was unchanged at 34.7 hours in August. Combining payrolls with hourly earnings and hours worked, the index of aggregate weekly payrolls gained 0.8 percent in August. The index is up 9.7 percent from a year ago.
The total number of officially unemployed decreased by 318,000 in August to 8.384 million. The unemployment rate fell to 5.2 percent while the underemployed rate, referred to as the U-6 rate, fell to 8.8 percent in August. In February 2020, the unemployment rate was 3.5 percent while the underemployment rate was 7.0 percent.
The participation rate was unchanged in August, coming in at 61.7 percent versus a participation rate of 63.3 percent in February 2020. The employment-to-population ratio, one of AIER’s Roughly Coincident indicators, came in at 58.5 for August, up from 58.4 in July but well below the 61.1 percent in February 2020.
Overall Outlook: Growth facing growing headwinds as Covid surges
The AIER Leading Indicators index posted a 17-point decline in August, the fifth consecutive drop, coming in at 58 versus 75 in July. The August result remains slightly above the neutral 50 threshold and suggests continued economic expansion in the months ahead. However, the string of declines also suggests that sources of growth will likely start to narrow in coming months.
The Roughly Coincident Indicators index held at 100 in August and has been above the neutral 50 level for eleven consecutive months. The strong performance of the Roughly Coincident Indicators index since the government-induced recession of 2020 reflects the broad-based economic recovery but the recent weakness in the Leading Indicator Index raises the likelihood of some setbacks in coming months.
AIER’s Lagging Indicators index maintained a weak 33 reading, well below the neutral 50 level. August was the 20th consecutive month at or below neutral. Overall, four indicators remained in an unfavorable trend, while two indicators had favorable trends, and none were in a neutral trend.
The rapid spread of the Delta variant and rising number of new cases is having an impact on consumer attitudes and economic activity. While the outlook is for continued growth, the headwinds are gaining strength. Furthermore, the rebound in demand that has emerged as lockdown restrictions were lifted continues to outpace the recovery in supply, leading to upward pressure on prices, though a 1970s-style price spiral remains unlikely. The resurgence in Covid is likely exacerbating ongoing labor difficulties including a lack of qualified workers, absenteeism, temporary shutdowns, and inability to retain talent. Continued economic expansion is the likely path but caution is warranted.