US economy still sees sluggish spending, depressed confidence

US consumers continued to spend in July but the gains were much slower than the prior two months amid a surge in coronavirus cases, and confidence remained in a “depressed range,” according to new data released on Friday.

Separately, Coca-Cola and MGM Resorts became the latest major companies to announce massive layoffs as a result of the declines suffered during the coronavirus pandemic. Coca-Cola did not say how many jobs would be lost in total but has confirmed it will reduce the number of its individual business segments from 17 to nine.

With the election in which he stands for a second term just two months away, President Donald Trump’s hoped-for economic rebound from COVID-19 has not materialised and analysts warn that absent more emergency aid from the government, it may not come anytime soon.

Personal consumption expenditures (PCE) rose just 1.9 per cent or $267.6 billion compared to June, after gains of 6.2 per cent and 8.6 per cent in the prior two months, the Commerce Department reported.

Even after sharp gains in the previous months, spending remains well below the level seen in February before the pandemic struck and forced businesses to shut down nationwide, causing tens of millions of job losses.

Personal income rose 0.4 per cent, after two months of declines, which the report said “was more than accounted for by compensation of employees as portions of the economy continued to reopen.”

Income from emergency government support programs dropped sharply last month, and many expired July 31. The White House and Congress remain deadlocked on a new package that would include support for state and local governments and an extension of expanded unemployment payments.

 MGM Resorts announced it was laying off 18,000 furloughed workers since the outlook remains uncertain, while Coca Cola was cutting its business units and offering 4,000 severance packages in North America, with more to come internationally.

After a 31.7 per cent plunge in GDP in the second quarter of the year, economists expect a rebound in the third quarter although the magnitude is in doubt. Another one million workers applied for jobless benefits last week, while there were 15 million fewer people employed last month compared to February before the pandemic forced business closures.

The University of Michigan’s consumer sentiment index edged up only slightly in August to 74.1 from 72.5, holding “in the same depressed range it has travelled during the past five months,” the survey’s chief economist Richard Curtin said.

Meanwhile, the PCE price index, the inflation gauge watched most closely by the Federal Reserve, slowed as well, ticking up 0.3 per cent, after a 0.5 per cent gain in June. The index is up 1.0 per cent compared to July 2019, the report said.

The Fed unveiled a policy shift Thursday that means the central bank will allow inflation to stay above its 2.0 per cent goal for some time without raising borrowing rates in order to maximize employment gains.

But that stronger emphasis on jobs will not be put into practice until the economy heats up and inflation returns. Even with unemployment at historic lows before the pandemic, prices rarely achieved the 2.0 per cent rate for long.

Excluding more volatile food and energy prices, PCE inflation was up just 0.3 per cent last month, and 1.3 per cent higher than a year earlier, the report said.

 A day after rolling out a new strategy for US monetary policy, Federal Reserve officials on Friday diverged over what it might mean in practice, saying there is no exact science to how they will apply their updated “framework.”

While the aim is to allow higher inflation and, as a side-effect, additional job growth over time, Fed policymakers differed over just how much more inflation they will tolerate or what metrics they’ll be looking at - a complication for investors or households setting expectations about the future.

Dallas Fed President Robert Kaplan said he would be comfortable with inflation running a “little bit” above the Fed’s 2% inflation target if the economy were to once again be running near full employment.

“And for me, a little bit means a little bit,” or about 2.25%, Kaplan said during an interview with Bloomberg TV. “I still think price stability is the overriding goal and this framework doesn’t change that.” The Fed announced on Thursday that its inflation target would be based on an average over time rather than a hard annual target, as had been the case since 2012.

Recognising when inflation has risen too much will depend on what else is happening with the economy, Cleveland Fed President Loretta Mester said. “This isn’t really tied to a formula,” Mester said in an interview with CNBC, nodding to Fed Chair Jerome Powell’s speech on Thursday in which he laid out the new strategy. “It’s really going to depend on what’s going on with the economy and how stable your inflation expectations are.”

Agencies