Continuing from yesterday:

At this early stage, most economists would anticipate another trend-like reading for August payrolls. That seems supported by a variety of labor market leads and also encouraging news that final demand has been a little stronger than initial Q2 GDP reported. At the same time, that additional demand appears to have come out of inventories, possibly leaving firms unusually lean heading into the second half. If political and other uncertainties are holding firms back, expect to see that in relatively low inventory accumulation and the pace of demand just ahead will test that notion. Part of the upward revision to demand reflects better exports than Commerce assumed. However, export orders from ISM surveys caution that external demand may be poised to slow (see below).

ISM Export Orders Index and U.S. Goods Exports (Year-to-Year Percent Change),
1988-Jul 12

The bigger question for the second half surrounds consumer behavior over the next few months. Growth in consumer spending eased slightly in Q2 despite the fact that real disposable income has been accelerating (see below). Much of that was anticipated because of the temporary surge in auto sales following earlier bottlenecks. Since that time, auto sales have stabilized and don’t point to any new trend in the sector. But the contrast between spending and income is more striking in the case of retail sales, where there have been outright declines in nominal sales for the past three months and virtually stagnant readings among core categories that factor directly into PCE. 

 Real Consumption and Real Disposable Income (Six-Month Smoothed, Annualized Percent Change), 2009-Jun 12

Some of that weakness may reflect the larger share of discretionary categories in retailing versus overall PCE where the mild winter may have robbed sales from the spring season. During the same stretch, there was a sharp decline in extended unemployment benefit programs that witnessed a dramatic dropoff in the number of beneficiaries from roughly 450,000 in March to just 6,000 as of late July. The decline in benefit payments associated with this amounts to a non-trivial $100 million per day in raw unadjusted terms (see below). The overall decline in transfer payments knocks the better part of a percentage point off disposable income gains as of June.

 Daily Unemployment Insurance Payments (20-Day Moving Average) and Unemployment Beneficiaries (Millions), 2008-8 Aug 12

That gap will not explain the softening in retail activity since incomes are still expanding at a healthy rate. It is possible that households are raising their saving rates in light of wider uncertainties like the unpredictable patterns in employment or, more speculatively, the clouds hanging over economic policy. One cannot fully explain recent confidence readings based on historical relationships to equities and gas prices or jobless claims. But it may also be another example of temporary inconsistencies yet to be sorted out. With the recent lift in financial conditions and more widespread coverage of stabilizing home prices, perceptions about personal finances may have brightened in the past month and July’s better employment news ought to help as well. 

This sets the stage for a potentially pivotal reading on retail sales in the coming week. Three straight declines are rare but do pop up in an economic expansion given seasonal sensitivities and sampling problems. Nonetheless, a fourth consecutive decline, especially in core categories would raise serious questions: We may likely have to brace for weaker output, rising jobless claims and slowing in employment beyond August. Expect a rebound in sales for July of about 0.3% for both total and core helped in part by healthy gains at large retail outlets.