Market Week: August 23, 2021

The week in review

  • Retail sales fell 1.1% in July

The week ahead

  • Fed Jackson Hole meeting
  • PCE

Thought of the week

According to the University of Michigan Consumer Sentiment survey, consumers are now the least confident they have been not just throughout the pandemic, but also in the last decade. July’s preliminary 70.2 print marks a 13.5% m/m and 5.3% y/y decline. This drop may be overstated as this month’s survey rests on a very small sample of roughly half of its normal full month 500 respondents. Furthermore, because the survey was conducted in early August it won’t reflect recent events such as the depressing exit from Afghanistan and some of the uptick in Delta variant cases.

While these events may dampen the public mood in the short run, this fall in confidence will likely be temporary. In the long run, it is usually not shocks that influence consumer sentiment the most, but rather four fundamental factors – unemployment, home prices, stock prices and inflation. Of these, unemployment is the most influential, explaining 55% of the variance in consumer sentiment over the last 25 years. The July JOLTS report showed a remarkable 1.3M more job openings than unemployed Americans – a factor that should push unemployment down and boost sentiment in the months ahead. The chart to the right illustrates the close historical relationship between unemployment and sentiment.

Looking ahead, while the direction of stock and home prices is uncertain, unemployment is likely to fall further and inflation should moderate. Consequently, while American consumers are experiencing the summertime blues now, sentiment should rebound later in the year.

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