GDP and Election Implications as Consumer Spending and Consumer Sentiment Conflict

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The stock market, the bond market and the economy are all supposed to be intertwined. This can become quite messy in an election year, and the post-coronavirus recession’s improvement in prior months appears to be showing some cracks. This has serious implications for the recovery of gross domestic product. It also may have implications for the election.

Consumer sentiment and how consumers are spending on their debit and credit cards can be very accurate real-time measurements of the economy. These private reports also can lead formal government reports by a matter of weeks.

24/7 Wall St. has tracked Friday’s reports, and there seems to be a slight divergence of what the consumer sentiment report looks like against actual consumer spending patterns. This matters because close to 70% of gross domestic product is tied to spending by consumers. There also are only about two weeks left before the third quarter of 2020 concludes.

The University of Michigan has released its preliminary reading on consumer sentiment covering the month of September. The headline sentiment reading rose to 78.9 from 74.1 in August. This is a sharp rise, but for reference to pre-pandemic readings the reading a year earlier was 93.2. The current situation index led the gains with a reading of 87.5, and the index for consumer expectations was down at 73.3. While this was the highest reading since the pandemic hit in March, the commentary indicated that the recent gain was consistent with an unchanged flat trend.

One issue that is coming into focus now is that the coming November election has started to have an impact on expectations about future economic prospects. The data from July to September indicate a virtual tie between Biden and Trump as far as who is predicted to win, but consumers who didn’t vote for “no difference” indicated that President Trump would be better that Biden for the economy and for their finances.

As for another look into the ongoing impact of politics in the eyes of consumers, the University of Michigan pointed out that it was Democrat consumers who posted gains in economic prospects. There also was weaker optimism about the economy among Republicans surveyed.

24/7 Wall St. has also tracked some private spending data from major banks, which is a bit at odds with the sentiment report. Remember that sentiment is an indicator of attitudes but spending is a measurement of actual activity.

JPMorgan has indicated that American consumers who used their Chase cards in the past week spent roughly 6.5% less than they did a year ago. That is also slower spending than in the week before, when a 3.5% drop was shown, and this may have an impact on the drag of no additional stimulus efforts. The slower spending also would indicate concerns that the federal economic support has started to fade.

BofA Securities issued a note on Friday that retail sales growth is fading and essentially has come to a halt in August, after having seen a post-shutdown surge. The firm noted that the initial V-shaped recovery had been driven by massive stimulus, which more than offset the loss of income. According to BofA, that money is now running out and there are likely to be negative trends in retail sales, and GDP could turn negative in the coming months without a new round of stimulus. BofA further points out for a weaker GDP:

The core indicator that goes into the GDP accounts surged 10.4% in May and 6.1% in June, but then slowed to 0.9% in July and fell 0.1% in August. Some of this slowdown is inevitable as sales return to normal, but the August dip is probably the first hint of fiscal stimulus fading.

Another view showed the risks of not reopening or reclosing the economy. Liberty Street Economics, within the New York Federal Reserve Bank, issued a report on Friday showing that reopening the economy increased consumer spending. While that should be obvious, their view was that economic reopening increases spending by about 2% in week two after the end of a lockdown. As for the impact on stimulus, Liberty Street’s earlier work indicated that the 2008 economic stimulus payments increased spending by 1.5% to 3.8% over three months.

Another stimulus compromise in Washington, D.C., currently looks elusive. That may have implications of its own in the weeks and months ahead. The divide in the nation heading into the election may lead to even more caution when it comes to consumer spending.

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