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How U.S. consumer spending will change as more offices reopen: Economist

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Joel L. Naroff, President of Naroff Economics, joins Yahoo Finance's The First Trade to discuss what's driving the U.S. consumer and future outlook.

Video Transcript

BRIAN SOZZI: Staying on the retail space, yesterday we got a glimpse of hope in the US economy. Retail sales rose 17.7% after a big plunge in April. Here to discuss what's driving the US consumer is president of Naroff Economics Joel Naroff. Joel, good to see you this morning. We're all trying to figure out what the true state of the US shopper is. How do you see it?

JOEL NAROFF: Well, thanks for having me. And I think what you have to realize is that we had a bad March and a terrible April. And now we're starting to see that all turn around. This is not a surprise. When you have record declines one month and the economy reopening, we should expect these kinds of numbers. But I think what we really want to look at is not the percentage changes, is what the levels are.

For example, in the piece I wrote through for my clients, I pointed out that clothing was up 188% in May from April. The only problem with that is it's still almost 65% below where it was in February. Those are the numbers and those are the comparisons you really have to start looking at. We're recovering. We're reopening. We're getting a lot better numbers.

But where we are we're not going to know for another few more months. And the key is levels rather than percentage changes, which I think at this point are really misleading.

ALEXIS CHRISTOFOUROS: Joel, what about what we're spending our money on and how this lockdown has really reshaped our spending habits? I mean, we've seen a lot of people make deposits into their savings and checking accounts because they're just-- there isn't a lot to spend on right now. But when we are spending, it looks like we're talking about nesting, right? Home improvement, boats, pools. And I guess that's going to be good for the home improvement retail chains, if nothing else.

JOEL NAROFF: Well, absolutely. You know, just think about it, you spend your money on the things that are affecting you at that particular point in time. And you know, what we had was in March and especially in April when the economy collapsed, people cut back. We had an extraordinary savings rate of 33%. It was just incomprehensible the number. And we knew people would start spending when things opened up. But you have to take a look at it. If you're not working in the office, as has been pointed out on the last person, you know, what you're doing is you're focusing your attention on where you're working, and that work is home now.

So you look at making things better at home, whether it's purchasing food at home, whether it's fixing up the house, whether it's doing all of the exercising you've been doing. You know worry about commuting. You don't worry about eating lunches or dinners out. Those things are by the board. Now we're looking at it.

But again, this is a transition phase. The more we open, the more we get people back into their offices, that too will begin to change, because they need to spend money on gasoline, on cars, on transportation, on food, on clothing for the office, that's going to change. Back but it's going to be slow.

So I think what you have to look at is, just as I said before, don't look at the percentage change. Look at the levels. Here, look at where your consumers are. Look at where your workers are. They're going to spend for those kinds of goods in the short term. In the longer term, we're going to move back to somewhere in between where we were and where we are now.

BRIAN SOZZI: Joel, how bad does the US consumer need either a return to work bonus like Trump advisor Larry Kudlow suggests or an extension of that $600 top-up for the unemployment claims?

JOEL NAROFF: Yeah, I think if you take a look at some of the numbers that have been coming out and looking at, just for example, the unemployment compensation numbers, where we're looking at something like half of the people are getting more than they were earning on their regular jobs. And the estimates are up to 3/4 of a percent of a number of people that are up that are making more on unemployment insurance. That's $600 a month-- excuse me, a week is really leading to spending power for a wide group of individuals and keeping things going.

If we don't get that, this is where the economy is going to have to stand on its own. Eventually that's going to happen. But if that starts in August, now we have to take a look at the income numbers. They're going to fall dramatically instead of rising as we've seen them. And that's going to affect consumer spending.

So I think Congress is ultimately going to do something. Whatever it is, it's clear that we're going to have an unemployment rate in July and August in double digits. We're going to have to keep subsidizing the consumer. And they're going to have to do something. I think, whether it's a back to work bonus or it's an amount each week is a political issue. The economic issue is we need the support, there's no question about that.

INES FERRE: Joel, Ines Ferre here. And what about when we get into the fall and back to school as well and going into the holidays? What are some of the challenges that you're expecting to see?

JOEL NAROFF: Well, we still don't know how schools are opening. And this is something that, you know, we're really beginning to focus on. The cost of reopening for a lot of school districts is enormous. And they're really debating how to do that. And that becomes somewhat problematic. So we don't know exactly how they're going to do it. Are they going to open fully? Are they going to open partially and have some remote learning?

I mean, these are questions we really, really don't know. And that really is going to follow through on things such as taking trips. What's going to happen in terms of the holidays and so on? Until the virus itself works itself through, you know, you talking about reports of hospitalizations rising, you know, what's going to determine the spending power is the confidence. And the confidence, to no small extent, is going to be determined by the virus itself. And we can't forecast that as economists. That's way beyond our pay grade.

So there's a lot of uncertainty for the fall. And the uncertainty is also that the government's support is going to start disappearing as we go through the summer and especially the fall. And that's when the economy has to stand on itself. And that's really the risky time.

BRIAN SOZZI: All right, we'll leave it there for now. President of Naroff Economics Joel Naroff, good to see you this morning.

JOEL NAROFF: Thanks for having me.