Despite the slowdown in job gains and the end of the federal government addition to weekly unemployment payments, consumers still spent strongly in September. Retail sales jumped by 1.9 percent for the month, nearly double market expectations. This pushed up total sales to more than 3.7 percent above the pre-COVID peak from January and by a solid 5.4 percent from a year earlier.
Very strong growth continues for most of the economy, but it has slowed from the extraordinary pace set earlier in the recovery. Notable exceptions are the service sector, which saw relatively faster growth in September versus a month prior, as well as housing and autos. Further slowing of overall growth is expected, but the pace of the recovery should remain above trend through at least next year.
Stronger survey readings in recent months suggest that the business sector has rebounded sharply from the COVID shutdown. The ISM services PMI rose to a 19-month high in September, the fourth consecutive month of solid expansion readings. The business activity and new orders components rose to the second highest levels ever, trailing only June’s reopening surge. All but one of the 17 industries within the survey reported growth for September. Even the employment component, which had lagged, climbed into expansion territory as service sector rehiring continues.
Nonfarm payrolls posted their weakest gain since the start of the post-lockdown surge. Still, with 661,000 jobs added for September, the labor market continues to rapidly heal as more businesses rehire workers and slowly build up staffing. The service sector led the way once again with outsized growth within the restaurant, retail, and health care sectors. There was a substantial drop in government employment, coming from both fewer teachers than usual in the COVID-19 world and a decline in temporary Census workers, resulting in a stronger 877,000 monthly increase for the private sector. The U-3 unemployment rate fell sharply again for September, down to 7.9 percent from 8.4 percent in August.
The housing market extended its strong post-COVID surge into August. Demand continues to increase for owner-occupied housing, pushed up by record-low mortgage rates, a rebound in the job market, faster household formations, and an increased desire for “space.” Existing home sales rose by 2.4 percent to an annualized pace of 6.00 million units for August, while new sales climbed by 4.8 percent over an upwardly revised July figure to 1.01 million units (annualized). The August sales pace for both was the fastest since 2006.
The post-COVID recession recovery continued at a strong pace in August with further sharp improvement for the labor market and solid expansion from the business sector. The rapid rebound in spending and hiring should drive a record 25-30 percent annualized surge in real GDP during the third quarter. After slower expected growth in the fourth quarter, the expansion should move forward at an above-trend pace in 2021 as vaccines become widely available. Key risks to the outlook include the timing of vaccine availability and the November elections.
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