• Resilient Consumers Keep Spending

    Resilient Consumers Keep Spending

    Resilient Consumers Keep Spending

    Rising COVID cases stemming from the virulent delta variant have driven governments and businesses to reimpose social distancing measures and delay return-to-office policies, putting a damper on some economic activity. But consumers continue to power through the end of the summer.

    Retail and food services sales unexpectedly grew by 0.7% in August, following a downwardly revised 1.8% fall in July. The month-over-month changes to the headline figure this year have alternated between positive and negative, but at 15.1% year-over-year growth, and at an 9.3% annualized growth since August 2019, it’s evident that retail and food services sales remain elevated, even as COVID cases rise sharply in many parts of the nation.

    Clothing sales remained high in August, the prime month for back-to-school shopping. Children and teens outgrew their clothing over the pandemic, and many workers being called back to the office are updating their wardrobes — although athleisure is still experiencing strong gains in sales. Clothing retailers overall are seeing sales at an annualized 7.5% higher than in August 2019.

    However, capacity limits and closures deeply affected sales at restaurants and bars, which were flat in August after five consecutive months of growth. The year-over-year increase of 31.9% serves as a reminder of the depth of last year’s pullback when many restrictions were in place. Food services and drinking establishment sales are up an annualized 5.1% since August 2019. Despite these gains, the sector largely underperformed analyst expectations during the summer, as pent-up demand for dining out and travel was thwarted by the ongoing pandemic.

    In contrast, sales from nonstore retailers grew by 5.3% in August — leading all major sectors, much like they did regularly in pre-pandemic times. Compared to two years ago, nonstore retailer sales have grown by an annualized 18%, also leading all major sectors.

    Despite the positive news on retail sales, consumers sentiment remains subdued. The University of Michigan’s Consumer Sentiment Index edged up by 0.7 points in September, after plunging in August to its lowest level in about 10 years. Consumers’ assessment of current economic conditions fell to its lowest level since April 2020. Expectations ticked up slightly, but also remain near pandemic lows.

    Labor Shortages Weigh on Businesses

    Businesses are likely being affected by the spread of COVID cases. A slight uptick in business optimism was seen in August, as reported by the National Federation of Independent Business, but businesses continued to report difficulty finding workers, with the net percent of businesses reporting difficulty hiring in August the highest of any point since the start of 2020. At the same time, fewer businesses reported positive business conditions — portending an outlook that is turning sour.

    Despite labor shortages, industrial production continued to ramp up in August as businesses see pent-up demand for certain goods a continuing boost. The Federal Reserve Board reported that industrial production grew by 0.4% in July, reaching its highest level in nearly two years. Energy goods were slightly elevated, growing by 1%. Otherwise, the monthly gains were balanced across most industries.
    Motor vehicle manufacturing has been challenged in recent months by the global microchip shortage. Production of motor vehicles and parts in August was 4.9% lower than a year ago. Many automobile makers have announced plans to cut production, including Ford, General Motors, Nissan and Toyota.

    Employment Growth Varies by State

    Last week we received state-level details of the disappointing August jobs report released earlier this month. Nonfarm job growth varied widely by state. Nineteen states plus Washington, D.C., saw employment levels fall over the month.

    At the top of the list, jobs in Kentucky grew by 1.1%, but the state has seen job growth of only 2.6% over the year. Meanwhile, Nevada’s reopening to tourism has helped recoup the state’s severe job losses in 2020. Nonfarm jobs there grew by 0.9% in August and 8.3% over a year ago.

    The poorest performer in August was Hawaii, which posted a 1% contraction in nonfarm jobs. While the state also reopened to tourism during the summer, travel has been discouraged and tourists have been urged to postpone trips until next month.

    The Week Ahead …

    The housing market will likely be front and center next week, with reports due for sales of both existing and new homes in August. Low mortgage rates and strong demand have been drivers of the market, but sales have cooled as inventories remain tight and prices are still high.

    The National Association of Home Builders releases the findings of its September survey of homebuilders on Monday. Sentiment fell sharply in August as builders wrapped higher construction costs into the price of their new homes, discouraging some potential buyers. Builders are sitting on a healthy supply of permits for homes they have yet to begin construction on, boding well for housing starts in future months.

    On Wednesday, also of interest should be the Federal Reserve's open market committee's statement — and press conference by Fed Chairman Jerome Powell — after its meeting this week. We expect to hear Powell suggest that tapering of asset purchases will begin in the near term, while still noting the labor market has a way to go before fully meeting the committee’s goal of broad-based and inclusive employment.

    CoStar Economy is produced weekly by Christine Cooper, managing director and chief U.S. economist, and Rafael De Anda, associate director of CoStar Market Analytics in Los Angeles.

    Source: CoStar Group, www.costar.com