EleVation: Some V-Shaped Economic Data to Cheer

Key Points

  • Goods-oriented retail sales have staged a full V-shaped recovery, and then some … but services consumption is another story.

  • Inflation concerns are elevated; but cyclical “price shocks” would likely only give way to systemic inflation if labor market slack diminishes significantly.

  • Stimulus has been, and will continue to be, a fillip to consumption; but there are reasons we shouldn’t extrapolate the coming surge in growth.

To V or not to V … that is the question

Two key economic releases last week fueled enthusiasm about the economic recovery; but it continues to be the goods side of the economy that’s been humming … not so much the services side. Case in point were the industrial production and retail sales releases. As you can see in the chart below, industrial production continues to improve; with the increase in January the fourth in a row. Although the year-over-year change is not back in positive territory, upcoming months’ comparisons will be against last year’s lockdown phase of the pandemic, so a swift move back into positive territory is a near-given.

Industrial Production Up, But Still in Negative Territory

Source: Charles Schwab, Bloomberg, as of 1/31/2021.

Retail sales was even more of a stand-out—significantly besting even the most optimistic of economists’ estimates. As seen below, retail sales are the poster child for V-shaped recoveries—with the year-over-year change now above pre-pandemic levels. In fact, in nominal terms, retail sales hit a new record high in January—no doubt helped by the latest round of $600 fiscal relief checks which began arriving the month prior. The recent strength is probably a preview of what’s to come after the passage of the “American Rescue Plan” currently being negotiated in Congress. The strength of the stock market has also represented “feedstock” for consumption. The only other times that retail sales beat expectations by so much were last June (coming out of the lockdown phase) and in November 2001 (after 9/11).

Retail Sales’ Full V Recovery

Source: Charles Schwab, Bloomberg, as of 1/31/2021.

The “breadth” of the report was perfect; with all retail sales’ categories higher on a month-over-month basis. Shown below are the categories’ year-over-year growth. Perhaps not surprising, food services, clothing and gasoline are bringing up the rear. Afterall, we’ve been dining out less, having video meetings with sweats and slippers on the bottom, and spending more time at home than in our cars. Also not surprising is online (nonstore) being in the lead.

Online Dominating Retail Sales’ Categories

Source: Charles Schwab, Bloomberg, as of 1/31/2021.