Encouraging Signs

Recent data pointed to the willingness of households and businesses to resume spending in May. Personal consumption outlays on goods and services increased 8 percent in May, retracing nearly 40 percent of the plunge over the previous two months. Especially encouraging was the bounce back in purchases of big-ticket durable goods, such as motor vehicles and appliances, that returned them to pre-pandemic levels. These are items that typically can be postponed. Not too surprisingly, the recovery in consumer spending on services—airline travel, hotels, health facilities, and hair care—has lagged a good bit.

Business orders for capital goods also turned up in May, after dropping 8 percent over the previous two months. Much of the focus of businesses early in the pandemic had been on garnering and conserving cash. Businesses could keep their powder dry by postponing commitments to buy capital goods, just like consumers could hold off buying big-ticket durable goods. But the upturn in orders for capital goods is showing that businesses are becoming a little more confident in prospects ahead and the returns that will come from new investment. This improvement matches a recent survey indicating a reduction in business uncertainty regarding the outlook for sales.

Meanwhile, the most reliable measure of consumer prices (the personal consumption expenditures index) stopped falling and ticked up 0.1 percent in May. The firming occurred across both goods and services. This suggests less of a shortfall of aggregate demand from the aggregate supply. (See June 13 post, Any Signs of Inflation Yet? and June 20 post, Has the Recovery Begun?).

More recently, the number of persons collecting unemployment insurance continued to drift lower, despite continued outsized new applications of about 1-1/2 million per week. The excess of people coming off unemployment rolls than going on suggests that about 2 million people per week have been returning to their jobs or are being hired into new jobs. Pretty remarkable!

Looking ahead, recent developments imply that consumers and businesses are ready to spend more and that production continues to ramp up. Of course, the outlook still is clouded by the course of COVID-19. But the extent of uncertainty has diminished a good bit and businesses have been very creative in how they are adapting. Progress may come in fits and starts, but this bodes well for a sustainable recovery.

See Chapter 2 of my recent book—Capitalism Versus Socialism: What Does the Bible Have to Say?—for more discussion of how incentives in market-based (capitalist) systems have proven most successful in spawning innovation and improvements in standards of living.