Record-setting performance of the US economy in May and June appears to be coming to an end with time of disappointment creeping in. I elaborated on this idea in my yesterday post discussing potential reasons for such development in August. The beginning of moderation phase in the US recovery was marked by Conference Board consumer confidence report released on Tuesday where the leading component of expectations posted worrying deviation from the forecast.

The broad index slid from 98.3 in June to 92.6 in July, missing estimate of 95.0 points. Not a big deal but tracking the components we can see that something isn’t right there – while the present situation index rose from 86.7 to 94.2 points, expectations index fell sharply from 106.1 to 91.5 points. It is the expectations of consumers and not the assessment of present situation that drives consumer spending which is better seen from the correlation below:

To understand why consumers reported an improvement in the current situation we should look at what happened to the key determinants of consumer confidence – income and wealth.

In July, the government paid increased unemployment benefits of $ 600, which more than replaced lockdown-related income gap of majority of recipients. In turn, continuing stock market upturn in July boosted wealth of consumers. In addition, the Cares Act, which took effect in in April, included moratorium on foreclosures and evictions, which temporarily reduced or delayed debt payments, spurring consumer potential.

But all good things come to an end. The income outlook is expected to deteriorate markedly in August when the current stimulus program is replaced by a more frugal stimulus package. Key unemployment benefits will be cut from $600 to $200, but respondents are beginning to worry about their income now reducing their consumption and increasing their precautionary savings.

The state-by-state change in the expectations index also revealed an interesting relationship: respondents from states with a more intense re-outbreak of Covid-19 in June were more worried about the future than respondents from “calm” states. For example, in California, the index of expectations fell by 25 points, in Michigan – by 53.3 points, in Florida – by 27 points, in Texas – by 32 points. Whatever one may say, it appears the second outbreak has significantly slowed down the economic recovery.

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