Economic Recovery Picks Up Steam

Popular Economics Weekly

FRED-UMich

The head of steam analogy seems to be working for our economic recovery, as consumers let off steam after two months of staying at home with a burst of shopping activity from the re-openings.

We said last week that many employers, including the auto and airline sectors, had been hiring back employees over the past month, hence a surprise jump in employment with the 2.5 million jobs increase in May. Now both consumer sentiment and retail sales are beginning to recover.

“Consumer sentiment posted its second monthly gain in early June,” said U. of Michigan survey chief economist Richard Curtin last Friday, “paced by gains in the outlook for personal finances and more favorable prospects for the national economy due to the reopening of the economy. The turnaround is largely due to renewed gains in employment, with more consumers expecting declines in the jobless rate than at any other time in the long history of the Michigan surveys.”

FRED/MarketWatch

And retail sales jumped 17.7 percent last month, the government said Tuesday, after two months of record declines. Sales had tumbled by a record 14.7 percent in April and 8.2 percent in March. The rebound in sales also reflects the loosening of restrictions on business activity after two months of stay-at-home orders to combat the coronavirus pandemic.

The burst of activity comes from pent-up consumer demand, as we said; i.e., not being able to shop for at least two months. Federal tax payments to families and more generous unemployment benefits also helped stoke higher sales.

Yet even after the rebound in May, sales were still 6 percent lower compared to the same month in 2019, showing the lingering damage caused by the lockdown of the economy. This tells me we will have a U-shaped economic recovery where GDP contraction will bottom in Q2 and GDP begin a gradual rise in Q3, rather than a quick return to normal growth (the V-shaped recovery).

This is because “Few consumers anticipate the reestablishment of favorable economic conditions anytime soon. Bad times financially in the economy as a whole during the year ahead were still expected by two-thirds of all consumers, and a renewed downturn was anticipated by nearly half over the longer term,” said U. Michigan chief economist Curtin.

Sales increased across the board with autos up 44 percent, clothing sales up 188 percent, 90 percent at home-furnishing stores and 88 percent at stores that sell books, music, sporting goods and other hobby items. Receipts also increased 29 percent at bars and restaurants that bore the brunt of the coronavirus lockdowns in March and April, says MarketWatch.

A gradual return to what will be called the ‘new normal’, particularly for consumers that power most economic growth, is really due to the lack of any national coordination of the pandemic response.
The perennially poor and science-denying red states currently have the highest infection rates with the exception of Oregon in second place and purple Florida ranked fourth, according to today’s NPR COVID-19 dashboard.

States that listen to the scientists will recover first and return sooner to a more normal growth, whereas the states and local governments that choose not to listen to experts in their haste to perhaps salvage the November election will continue to suffer from the effects from higher rates of infections and social-isolation.

Harlan Green © 2020

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