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Consumer Spending Falls

Overview: Over the past week, investors were watching to see what effect the spread of COVID-19 would have on consumer spending. Tuesday’s report on Retail Sales revealed greater than expected weakness, and mortgage rates ended the week a little lower.


Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of the health of the economy. It has been extremely volatile this year, mostly due to the timing of stimulus checks. Now, investors are worried that rising COVID case counts will restrain spending, and the latest results increased those concerns. In July, retail sales fell 1.1% from June, which was far below the consensus forecast for a decline of just 0.3%. The greatest weakness was seen in autos and clothing. Considering the bigger picture, though, sales still were 16% higher than a year ago.

Given the immense need for more homes in many areas, investors have been closely monitoring the monthly reports on housing starts, and the latest data contained mixed news. In July, housing starts fell 7% from June, while building permits, a leading indicator, rose modestly. Builders say that rising prices and shortages for land, materials, and skilled labor are restraining the pace of construction.

Federal Reserve officials have reminded investors repeatedly this year that the timing of monetary policy tightening will be based largely on the amount of progress toward their labor market and inflation goals. The minutes from the July 28 Fed meeting released on Wednesday said that the economy had reached its inflation goals, and officials were “close to being satisfied” with the progress on job growth. Since that meeting, the latest Employment Report revealed stronger than expected job gains in July. Putting it all together, investors now expect that the Fed will announce at its September meeting that it will begin to scale back (taper) its bond purchases during the fourth quarter.

Week Ahead

Looking ahead, investors will monitor comments from Fed officials for hints about the timing of future monetary policy changes and will track COVID case counts globally. Beyond that, it will be a light week for economic data with a focus on the housing sector. The Existing-Home Sales report will come out on August 23, followed by New-Home Sales on August 24.


Retail Sales (% change)



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