U.S. Economic Outlook

After the drop comes the rebound. Will that be followed by a long recovery?

Economically speaking, the main direct impact from the pandemic might be well behind us, as evidenced by both the sharp decline in April, and the strong bounce of May and June. Thanks to a combination of generous fiscal support and a rather quick re-opening, the immediate impact was less than some had feared. Still, the second quarter real gross domestic product (GDP) dropped historically by an unprecedented 33% quarter-over-quarter annualized. After April has been hit hardest, the rebound in May and June resulted in record-setting gains in most economic indicators. July's data, however, suggests that we may already have converged toward a flatter path of recovery.

Economists, such as myself, are used to dutifully updating our charts on almost every statistical release. Still, the pandemic even left its footprint in our daily routines. Besides the obvious part of working from home, we were overwhelmed by the sudden flood of new and alternative data that suddenly gained market attention. For instance, weekly data on credit- and debit-card spending for different income levels can provide striking insights (see Chart 1).[1]

Chart 1: Weekly data on debit- and credit-card spending indicates consumption to remain subdued (relative to January levels)

202008_U.S. Economic Outlook_CHART 1_Affinity_EN_72dpi.png

Sources: tracktherecovery.org and Opportunity Insights 8/13/20

Right after the start of the stimulus payments around April 15, U.S. households in general, but especially low-income earners, increased their spending quite rapidly, close to levels seen just before the pandemic. This is most likely because spending of low-income earners mainly covers staple goods and services. A better proxy for the overall activity of consumption therefore could be the spending of middle-income earners if the goal is to track the average person's spending patterns. Despite a steady recovery, somewhat slower than that seen among low-income earners, it remains at around 8% below pre-crisis levels – a trend that solidified through July 2020. Meanwhile, high-income earners seem to have been in no rush to open their wallets – "excess spending" recovered more slowly and still remains around 10% below pre-crisis levels.

It is quite revealing to cross-reference alternative data alongside classical economic indicators. Retail sales for instance usually have been a sound gauge of overall consumption. This time around, however, personal consumption reveals the underlying story. Retail sales dropped 7.5% in the second quarter while personal consumption as a whole dropped by 10.5%. The main difference between both measures are services. Personal consumption as measured by national accounts includes more of them than the retail-sales report. Alternative data proved to be quite accurate – debit- and credit-card spending declined by 11% by the end of June – close to what we observed in personal consumption. This by no means should imply that traditional measures are no longer useful. We believe that statistics on retail sales can still give us a quite useful understanding of how the structure of spending has changed as Chart 2 shows. The longer time lag of traditional data is compensated by a higher degree of detail.

Chart 2: Retail sales since January 2020 for different sectors in percentage change

202008_U.S. Economic Outlook_CHART 2_Retail_Sales_EN_72dpi.png

Sources: Census Bureau and Haver Analytics as of 8/13/20
* General merchandise, apparel and accessories, furniture and other sales; June 2020 data as GAFO lags one month

Chart 2 reveals two trends. On the upper half we observe the pent-up demand and deferred-spending area. One-time payments certainly boosted shopping for hobbies, home and garden as well as groceries – preferred distractions for many from the virus madness. Non-store retailing (i.e. internet shopping) was especially a friend during the lockdown. The lower half of the chart shows what we call the missed opportunity space. Missed spending on most services is likely to be gone forever. Taken together, traditional and alternative data sources suggest that fiscal stimulus brought back consumption, but in ways that reveal a massive change in consumer-spending patterns

The rapid change of where consumers choose to shop might have far reaching consequences. Since March, over 170 companies have filed for bankruptcy, citing Covid-19 as one of the main factors behind their decision.[2] And the real number of closings could be even higher. As a very prominent news outlet puts it: "Small firms die quietly, leaving thousands of failures uncounted." Simply closing down does not show up in bankruptcy statistics.[3] Data from another private vendor indicates that 55% of all businesses that closed in the aftermath of March 1 were out of business permanently by mid-July.[4] An inconvenient truth surrounding these findings is that small businesses account for roughly 44% of economic activity and represent approximately 50% of all people employed.[5] Or in other words, the U.S. economic power house is silently shutting down.

And this loss of momentum already starts to become visible in traditional employment statistics. While there was better-than-expected job creation in July it was materially lower than during the bounce-back months of May and June. The bulk of job creation was concentrated in the vulnerable service sector: about 1.42 million jobs out of the 1.46 million of total private non-farm payroll gains were created there. In the intervening weeks since the cut-off date, some of those jobs may have already been lost again, as a result of the re-introduction of measures to fight the pandemic. Taken at face value, the report implies that roughly 16 million people are still unemployed, compared to 5.78 million in February. This impressively illustrates that we well have a long road toward a full recovery ahead of us.

With the labor-market recovery losing momentum and extended fiscal benefits fading out, the consumer could face some hard decisions ahead. The good news might be that it seems like he or she can still keep up for at least some time. Personal-income data shows that households still enjoy significantly higher than pre-crisis savings as well as a comfortable income cushion from unemployment transfers by the end of June (see Chart 3). We expect consumers can well make it through August, maybe September if we account for recent executive orders before getting into trouble. We caution, however, that these household aggregates hide that a certain proportion of the population might already face troubles.

Chart 3: Personal income and savings suggest households still can keep up for some time

202008_U.S. Economic Outlook_CHART 3_Personal_Income_EN_72dpi.png

Sources: Bureau of Economic Analysis and Haver Analytics as of 8/13/20

The ultimate relief of the situation would be another round of fiscal support for households. But it is not just monetary support for the consumer we are looking for. Extended financial support for small and medium-sized businesses as well as for state and municipals is needed as well. While the latter still have some room to navigate by adjusting their investments and their spending, small and medium-sized businesses are already pulled into the abyss.

However, up to now we do not have any real progress on a fiscal package in Congress. While it seems that the majority of politicians and officials welcome another round of support, negotiations stalled, election considerations dominate, and no solution appears in sight. Whatever the reason for the stalling of stimulus talks in Washington might be – political maneuvering or hopes of an early arrival of a vaccine – we caution that a political failure could prove costly. A swift arrival of a vaccine might well be a silver bullet for financial markets but by no means a silver bullet for the economy. A recent poll shows that approximately 35% of all Americans would not get vaccinated.[6] Besides the high uncertainty of how widely available or effective a vaccine might be at the end, the current preferences still foreshadow a less favorable course of the pandemic.

Overview: key economic indicators

2019

2020

2021

2022

Q4

Q1

Q2

Q3F**

Q4F

Q1F

Q2F

Q3F

Q4F

Q1F

GDP (% qoq, annualized)

2.1

-4.8

-32.3

29.8

16.9

5.3

3.4

2.4

1.9

2.0

Core inflation (% yoy)*

1.6

1.3

1.0

0.3

0.1

0.4

2.2

2.8

2.6

2.5

Headline inflation (% yoy)*

1.6

1.7

0.6

1.4

1.2

1.2

1.6

1.9

2.1

2.0

Unemployment rate (%) (EOP)***

3.5

4.4

11.1

11.5

8.6

7.1

6.4

6.1

5.8

5.5

Fiscal balance (% of GDP) (EOP)***

-5

/

/

/

-18.2

/

/

/

-8.3

/

Federal funds rate (%)

1.5-1.75

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

0.0-0.25

*PCE Price Index
** Forecast
*** End of period

 

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