We have upgraded our near-term economic outlook on the US economy, as some encouraging economic data has come out recently. However, the ongoing COVID-19 crisis, including recent spikes in cases throughout the country, ongoing social distancing measures, international and domestic tensions, and the threat of a return of lockdowns means investors should not get too complacent.
Back from the Abyss: Green Shoots Sprouting Throughout the US Economy
While it is welcome news that the US economy is re-opening, and economic activity is slowly getting back to normal, the recovery is not evenly spread throughout the country. The latest Google mobility data suggests that US states such as Idaho and Montana have essentially returned to their pre-COVID-19 levels in terms of economic activity, in areas such as entertainment, restaurants, and retail. However, in other areas of the US, such as in Illinois and Michigan, such activities are still down 20%-30%, while in the most populous coastal states, such as in California, New Jersey, and New York, these activities are still down close to 50% from their pre-pandemic levels.
Despite this lower traffic, some recent economic data has indicated that there are green shoots sprouting throughout various areas of the US economy. Vehicle sales have been rebounding in recent weeks, as cash-rich buyers have entered the vehicle market in search of deals. According to data analytics and consumer intelligence company JD Power, the typical car buyer is around 50, indicating that demographics is playing an important role in this recent uptick in vehicle buying. This specific customer demographic tends to be older, have a strong credit history, and is more financially stable. This group is currently in a better position to take advantage of some of the car deals currently available, due to the COVID-19 pandemic, relative to a someone working in a cyclical industry, or who has just lost their job in recent months.
Further, mortgage applications for home purchases have risen for eight straight weeks, to record some of the best activity not seen since the 2005 housing boom. Falling mortgage rates, due to record-low interest rates, have boosted housing affordability, and subsequently housing demand. Increased consumer preference for new, high-tech homes with amenities for both school and work, a sharp contraction in the supply of existing homes available for sale, and a growing desire to flock to the suburbs amongst city dwellers, are some of the major catalysts increasing housing demand in recent months.
Further, prospective home buyers are also likely to be purchase either a second home, or an investment property, which is still a boon for the broader economy, as this helps to encourage additional construction activity. This helps to provide new jobs and promote additional economic activity, and commercial & retail spending, on furniture, fixtures, building supplies, construction equipment, garden equipment, and home furnishings.
Signs of Life: US Jobs Market and US Equities Show Encouraging Developments
Another important sign for the US is that the jobs market is beginning to show some encouraging economic developments.
Economists were caught off guard by the surprise rise in employment in May. Recent weekly claims data suggests that firings continued into the millions, while demand indicators such as the ADP payrolls report and ISM employment indices indicated no real increase in demand for new workers. Instead, the recent hiring appears to be in the small and mid-sized enterprise ("SME") sector, as small business begin to open up.
The paycheck protection program ("PPP") has been credited as a key driver of this increase in hiring. The US$669 billion business loan program provides incentives to firms that re-hire their fired employees. Recent NFIB small business data showed a slight uptick in hiring in May, as over 75% of SMEs applied for the loans, with 93% of them receiving the funds. The PPP has helped to provide some much-needed optimism for the US economy.
Simultaneously, US equity markets have also provided a much-needed boost in sentiment for the US economy, essentially defying gravity in the face of depressing economic data. Since the March lows, the S&P 500 has surged over 46%, with the Dow Jones Industrial Average up over 53% during the same time, as investors bet on a "V"-shaped recovery in the US. However, it is the Nasdaq that has been the clear winner thus far, rising over 66% since March, as the index has been seen as a "safe haven" by investors, as technologies such as social media, e-commerce, and tele-health have been in high demand since the start of the COVID-19 crisis.
However, despite the optimistic tone within the US equity markets, it is much more sombre in the fixed income markets. The yield on US Treasuries continues to fall, with interest rates on the benchmark US 10-Year Treasury falling to an all-time low to 0.585% in July, as unprecedented stimulus measures from the Federal Reserve, as well as continued demand for safe haven assets, continue to provide support for US bonds. It is here, we get a sense that the US economy is not out of the woods yet.
Dark Clouds Still Hovering of the US Economy
First and foremost, the ongoing COVID-19 pandemic, and the race to create a vaccine, is the key catalyst moving markets at the moment.
Regions that re-opened earlier have seen a spike in new case, versus those regions that remain under lockdown. To make matters worse, the US is one of the top countries to see exponential new cases on a daily basis, alongside India, Brazil, and South Africa. The risk we see here, is that if the number of new cases continues to climb, we could see renewed calls to re-impose widespread lockdown measures. Further, as a vaccine is still a ways away, it is too soon to be complacent about the potential health and economic costs the virus will have on both the US and global economy.
Additionally, ongoing social distancing measures, travel restrictions, and cautious citizens will prevent a return to pre-COVID-19 normality. If retailers and hospitality venues, especially small and speciality businesses, can only have a limited number of customers at a time, many may find it not economically viable to continue operating, and choose to shutdown operations instead. This in turn, could lead to additional jobs losses, and even permanent closures. Further, with global demand continuing to remain weak, hiring in the global service and manufacturing sectors could remain tepid.
A Long Road Ahead to Recovery
In addition to the virus, the political backdrop of the US is still fraught with partisan politics at the moment. Social unrest stemming from protests over race relations, the looming uncertainty over the 2020 US Presidential election, as well as heightened tensions between the US and China, have all created an environment of entrenched division that will make reconciliation, both domestic and international, quite difficult. Political risk, whether it be domestic or geopolitical, could have a negative impact on economic activity and sentiment, at a time when the US economy is trying to stand on its own two legs once again.
In terms of the financial markets, the risk of a wave of corporate bankruptcies, debt defaults, unexpected market corrections, and a sudden drop in investor confidence, are all lingering risks that investors should be mindful of.
Overall, while we have revised upward our near-term economic forecast, the interim risks suggest to us that a V-shape recovery is unlikely, as a return to pre-pandemic levels is about year or two away in our view. Instead, we believe that a "✓"-shaped recovery is much more likely for the time being.
© 2020 Economics Global Inc.
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