Personal income rose 1.1% in July after rising 0.2% in June (revised up from 0.1% in the previous release). Wages and salaries rose 1.0% in July as the number of employees rose by nearly a million. Owner income (income that businesses generate for their owners) fell 0.2% month-on-month after rising 15% between December and June (actual change, not annualized). Personal transfer income rose 2.9% in July as the introduction of child tax credits offset lower unemployment benefits.
Consumer spending growth slowed from 1.1% to 0.3%, which has been revised upwards from 1.0%. Private consumer spending on services rose by 1.0% after growth of 1.1% in the two previous months; Personal consumer spending on services has increased a cumulative 6.1% (not annualized) since February as more Americans were vaccinated and the high-contact industry rebounded – think restaurants, bars, amusement parks, casinos, and entertainment venues. Consumer spending on services has rebounded above pre-crisis levels, although this is partly due to higher prices, i.e. inflation – real private consumer spending on services in July was still 3.1% below its February 2020 level.
Consumer spending on goods fell 1.1% in July, while spending on durable goods fell by 2.3% and spending on non-durable goods by 0.4%. Disruptions in global supply chains (it’s hard to overestimate how screwed up they are now) limit the supply of consumer goods and contribute to higher prices. Disruptions in the supply chain are a particularly serious problem for the automotive industry and are holding back sales of new vehicles. But consumers are also redirecting spending to services of goods as the impact of the pandemic on spending patterns wears off.
The consumer spending price index rose 0.4% in July after rising 0.5% in June. The PCE core price index excluding food and energy rose 0.3% from 0.5%. Both headline and core PCE inflation were the lowest in July since February. Inflation skyrocketed in the first half of 2021 but is now cooling off, further evidence that the increase was largely temporary, i.e. due to one-off factors and is not an indication of much higher future trend inflation. Inflation is likely to cool further over the next 12 months as conditions in the global supply chain improve and price increases of affected goods (especially cars and trucks) slow or reverse.
This is a high pressure economy. The V-shaped recovery from the pandemic and aggressive monetary and fiscal stimulus have fueled robust demand from consumers and businesses. At the same time, supply chain disruptions, labor shortages and other problems caused by the pandemic are limiting the ability of businesses to grow and meet this demand. Spending and income growth should be very good in the second half of 2021 as the economic disruption from the pandemic subsides and the delayed effects of stimulus measures add further spikes in consumer demand.
The Delta variant is the most obvious downside risk to the economic outlook in the second half of 2021. But with each successive wave of the pandemic having less of an impact on the economy, Delta is likely to take less economic toll than its human toll.
The goods trade deficit narrowed as demand for consumer goods fell
The Census Bureau’s merchandise trade forecast forecast showed a monthly deficit of $ 86.4 billion in July, compared with $ 92.1 billion in June. Consumer goods imports fell from $ 62.4 billion in June to $ 59.7 billion in July, the lowest since December 2020; the decline in consumer goods imports accounted for half of the monthly decline in the trade deficit. As the pandemic has less of an impact on American buying behavior, consumers are spending more of their money on contact-intensive services – think restaurants, bars, travel, entertainment – and less on goods. This is a return to pre-pandemic spending patterns after goods spending skyrocketed in 2020 as Americans huddled at home.
Exports rose from $ 145.3 billion to $ 147.6 billion due to higher sales of capital goods, automobiles and parts, and consumer goods; 40% of the monthly decline in the trade deficit was due to higher exports. Foreign demand for US goods has recovered more slowly from the pandemic than US demand for overseas products, but is now catching up.
The goods trade deficit will continue to shrink in the second half of 2021 as the trends that pushed it down in July continue: Americans spend more on domestically produced services and less on imported goods, while foreign buyers of American goods ask for more when their economies recover and reopen. The clutter of global shipping is a wild card for the prospects for world trade – it’s hard to overestimate how screwed up global supply chains are, with pandemic restrictions, bottlenecks in ports, soaring prices and sudden changes in trade patterns, all of which add to serious uncertainty and delays in shipping. Whether it takes a few months or a few quarters, these issues will gradually improve – and when that happens, world trade will continue to recover as companies that ran out of inventory during the 2020 and 2021 shortages replenish them.
Slight revision of second quarter GDP
Real GDP growth in the second quarter of 2021 was seasonally adjusted in the second estimate by the Bureau of Economic Analysis and, when projected for the year, was revised upwards by a hair to 6.6%, compared to 6.5% in the preliminary or first estimate.
The minor revision of GDP reflects upward revisions in fixed investment and non-residential exports, which are largely offset by downward revisions in private inventory investment, residential fixed asset investment, state and local government spending and imports. Lower imports mean that a larger proportion of domestic spending was spent on the domestic economy.
For the future outlook, the insight from the GDP revisions is that company stocks are far too low. The decline in private inventories depressed real GDP by 1.3 percentage points in the second quarter of 2021 (the first estimate was -1.1 percentage points) after subtracting 2.6 percentage points from real GDP in the first quarter.
It’s hard to overestimate how screwed up global supply chains are. Delivery delays and bottlenecks have made it extremely difficult for companies to hold stocks and prevent an even faster economic recovery. The economy will get a huge tailwind from the inventory replenishment in the second half of 2021, which will sustain very rapid economic growth.
The second estimate of real GDP includes the first release of corporate earnings for the second quarter. They rose 9.2% quarter on quarter (non-annualized) to an annualized level of $ 2.786 trillion, representing 12.3% of GDP for the quarter versus 11.6% in the first quarter, 10.7% of GDP for the year 2020 and 11.1%. in 2019. Corporate earnings recovered rapidly from the recession and hit new all-time highs, aided by stimulus programs, the rapid resumption of activity and the weaker dollar, which has increased the dollar value of profits generated in overseas economies.
Corporate America is doing great. Rapid growth in corporate earnings and very low interest rates have helped the stock market rise to record highs.