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GDP Growth at -32.9%!!! Have We Finally Reached Rock-Bottom?

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This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here


The coronavirus appears to have a tight grip on our social and economic activity. Many of the regional attempts in the U.S. to reopen an economy and return to a somewhat normal social life have caused a resurgence of infections. So bad news appears to be piling on, in terms of economic numbers at the federal level.

It was assumed for the past few months — especially during the beginning of the economic lockdown — that the temporary negative effects would be quickly reversed once we open the doors again, and engage in pre-lockdown consumption levels. This appears to be farfetched, at this point. Especially as one of the key elements of fiscal stimulus, the CARES Act, expired recently. Congress seems to be unable to agree on prolonging the stimulus package designed to help unemployed individuals.

Consumers appear to concur, too. The recovery is not a walk in the park, not even while maintaining social distance. The U.S. consumer confidence index decreased in July after increasing in June, from 98.3 to 92.6.

While we don’t want to contribute another letter in the alphabet soup that describes the ultimate shape of this U.S. recovery, we do want to offer some insight into our expectations — on progress, or the lack thereof, from here on out.

While monetary and fiscal policy are important and crucial elements in alleviating the impact of the economic lockdown (fiscal policy more than monetary policy), we do agree with Fed Chair Jerome Powell:

“The path and pace of the U.S. recovery cannot be divorced from the efforts to contain the virus.”

With consumer spending making up 2/3 of the US GDP, it cannot be ignored. A path to full recovery requires a healthy and confident consumer base. Recent efforts of a number of states to simply open up the economy and hope for the best are examples of an approach that ignores this insight.

It remains paramount to us: any attempt to reopen U.S. economic and social activity needs to be implemented with great caution and strict adherence to safety guidelines. Any expectation of a recovery in the 3rd quarter depends largely on our ability to implement this process, in our view. More than any forecast of additional fiscal and monetary policy.

Some encouraging news is emerging. Early recent declines in daily new cases from some of the states with the biggest recent flare-ups appears to indicate. The authorities, and their stricken populations, might be getting back on the right track.

In particular, the personal spending increase in the 2nd quarter, from April on out, suggests that a consumer spending trough might be behind us. For instance, real consumer spending rose +5.2% in June. Big ticket spending appeared to rise. A surge in home-buying, do-it-yourself construction projects, major appliances and auto loan applications might cause follow-through in other categories.

However, these early numbers cannot be extrapolated too far out. A number of high frequency data points — such as the number restaurant diners tracked by OpenTable for instance — show that consumer activity declined again in July, very likely as a result of concerns of increasing virus infection rates.

One of the key contributors of the ability of U.S. households to return to a somewhat pre-coronavirus level of consumption activity will be the absolute amount of contribution from fiscal policy, in form of the CARES act payments. This buffer to a loss in employment compensation contributed to somewhat continued spending prowess throughout the last few months.

Albeit not the entire income from the CARES act ended up being spent, in some individual cases.

A discrete step-up in Disposable Personal Income (from direct CARES Act payments) was indeed met with an immediate rise in Consumer Confidence-Present Situation sentiment.

It will remain crucial, in our view, to support the U.S. consumer. Even if we cannot alleviate the threat of the virus, we might at least provide a financially healthy environment. That is conducive to a continuation in healthy consumption habits.

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