Disappointed Consumers Temper U.S. Economy’s Main Growth Engine

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(Bloomberg) — American consumers’ hopes of completely and quickly escaping the clutches of Covid-19 have been dashed by a more contagious variant, renewed mask mandates and uncertainty surrounding in-person returns to schools.

A pickup in inflation, including higher costs for fuel and household energy, has also dimmed prospects for more robust spending and economic growth. By one measure, consumer sentiment slumped in August by the most since the darkest days of the pandemic. Another fell to its lowest since February. 

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Before the delta variant emerged, vaccines fueled one of the strongest quarters in decades for household spending, a category that accounts for about two-thirds of economic growth. But odds of further outsize spending growth through yearend have been scaled back.

​​”You think about the engine of growth from this spring through the early summer, it was this re-emergence of leisure activities and services spending and people pulled back spending on goods,” said Michelle Meyer, head of U.S. economics at Bank of America Corp. “And obviously this most recent rise has challenged that.”

Forecasters expect consumer sentiment data out Friday to remain depressed.

Economists at Goldman Sachs Group Inc. cut their estimate for spending in current quarter to a 0.5% annualized decline. They also reduced their fourth-quarter consumption growth projection to 3.5% from 6%.

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Adding to the pandemic-related angst about the economy is disapproval of the Biden administration’s handling of the U.S. evacuation from Afghanistan that resulted in the deaths of 13 service members. Weather-related destruction also has the potential of shaking attitudes in some parts of the country.

“If you get a couple more of these weak sentiment indicators, and that coincides with disruptions to back-to-school and then you tack on maybe debt ceiling showdown in Congress that comes on the heels of an Afghanistan debacle, then you could see consumer spending really take a step back,” said Brett Ryan, senior U.S. economist at Deutsche Bank AG.

The University of Michigan’s latest survey of consumers shows a record share of people say it’s a bad time to buy vehicles because of high prices, while home buying conditions are the second-worst in data. 

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Meantime, prices are rising faster than wages in most industries. More consumers than at any time since 2012 see their financial situation worsening in the coming year. 

Even for the consumers that are keen to purchase big-ticket items like cars, supply chain bottlenecks and higher prices are likely to deter spending. Morgan Stanley economists more than halved their estimate for third quarter growth last week, pointing to lack of inventory, inflation and the waning impact of stimulus checks. 

To be sure, airports and restaurants are busier than they were a year ago, while entertainment venues are stirring back to life. While that indicates consumers are hankering to get back to their typical spending patterns, the more contagious delta variant is causing some consumers to pull back their activity, according to high-frequency data. 

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What Bloomberg Economics Says…

“A slew of disappointing consumer spending data points to a weak start to the quarter amid a resurgence of Covid-19, higher prices, and product shortages. Recent negative data surprises underscore how the delta variant remains a key determining factor for the U.S. economic outlook.”

— Bjorn van Roye, Anna Wong and Andrew Husby, economists

For the full note, click here

Economists at Bank of America have revised down their estimates for household spending for the current quarter, though they expect spending to rebound once the delta wave of infections subsides. Much like other virus waves of the past 18 months, however, no one is sure how long this wave will last, and when the next will emerge.

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Uncertainty about the path of the delta variant has led schools and businesses to rethink plans to be fully in-person this fall. That could make it more difficult for parents to return to the workforce, dampening income prospects at the same time that federal enhanced unemployment benefits have expired. 

Political Sentiment

In addition to concerns about the delta variant, government policy is leaving many Americans feeling deflated. President Joe Biden’s approval rating has dropped to an all-time low of 39%, according to the latest Economist/YouGov poll, conducted Sept. 4-7.

That’s the first negative reading since his inauguration and reflected declines among Democrats, Republicans and political independents, as well as his handling of the economy, the coronavirus and the exit from Afghanistan.

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At the same time, Congress faces a collision of crucial deadlines this month. Lawmakers will have to pass a stopgap funding bill to avoid a government shutdown, and they’ll have to raise the nation’s debt ceiling over the next several weeks to avoid a default on federal payment obligations.

“A debt ceiling dispute like the one that occurred in 2011 could further erode consumer confidence,” Michael Pugliese, an economist at Wells Fargo & Co. said in a note. “Furthermore, even if the debt ceiling does not cause any major disruptions, a shutdown could still weigh on the economy.”

©2021 Bloomberg L.P.

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