In the last couple of weeks, several populous states, including Florida, Texas and California, have experienced flare-ups in COVID-19 cases. Despite this, the stock market continues to rise and is once again near February’s historic highs. Is the market losing touch with economic reality or are investors seeing real silver linings?
Encouraging economic data, with all the makings of a V-shaped recovery, doesn’t feel as good as it looks on paper. As quickly as things are improving, there’s still a long way to go, and case numbers are rising in many communities. But innovative thinking—like a renewed interest in “pooled testing” to expand testing capabilities and reopen schools in the fall—offers hope.
The government’s $4 trillion relief measures for COVID-19 won’t have much of an effect on GDP until consumers are able to travel and spend freely again. While there has been some encouraging economic news over the past couple of weeks, the additional $600 in weekly jobless benefits is set to expires on July 31. Since income is the key to the economy’s recovery, Washington may need to provide a few more lifelines before a vaccine arrives.
Reports last week showed a burst of retail sales activity in May that recouped almost two-thirds of the ground lost in March and April. This week, the Commerce Department delivers its consumer spending report, which should help paint a clearer picture of the recovery. Finally, publicly held debt surged to 103 percent of GDP in May—should we be worried?
The social distancing protocols that were implemented to disrupt the spread of COVID-19 were also a shock to aggregate supply. While aggregate demand is likely robust as some businesses reopen, the cost of services at those businesses may increase due to capacity limits. So although the economy may make good progress over the summer and fall, the road to a full recovery will still be rocky for many businesses and consumers.
The May jobs report was a big deal, not because it was particularly surprising, but because it provided a positive boost to the recovery narrative. As workers continue to move back onto their employer’s books and consumer spending likely increases over the summer, there are two other trends to watch that may help determine the strength of the recovery.
Unemployment rates in the upcoming May jobs report are expected to near 20 percent—the highest since the Great Depression. Before making any other dire comparisons to the US economy in the 1920s-30s, consider how unemployment numbers are calculated and how COVID-19 lockdowns have contributed to the current economic situation.
Economists estimate that COVID-19 shutdowns have cost the U.S. economy billions of dollars per day. In response, the federal government has allocated trillions of dollars to protect jobs and businesses. Though there is little data on the effect of these efforts, an early sign of improvement may be that the number of people receiving unemployment benefits last week held steady.
Consumer demand collapsed around the middle of March due to COVID-19 shutdowns. By late March, however, the savings rate jumped to 13.1 percent—nearly $1 trillion annualized. Will this build-up in savings unlock pent-up spending and help accelerate the economic recovery?