There has been a dislocation for months between the stock market and the economy. In the U.S., the largest technology and communication services sector companies that benefited from reduced mobility and personal interactions helped lift major stock indexes back to new highs. However, economic recovery and corporate earnings recovery are necessary over the next year to justify asset prices and move us higher. Coronavirus case counts are coming back down, which will eventually help. We’re also seeing improvement in high frequency economic data and employment. What has been most encouraging is retail sales returning to new highs. These sales figures have likely been supported by fiscal stimulus including recovery rebate checks and federal unemployment benefits. Outside of some executive actions, that supplement is drying up as Congress struggles to come to terms with the scope of additional relief required to sustain the recovery.
The economy’s recovery is still inextricably linked to the coronavirus’s spread – at least until there are viable vaccines or reliable treatments. Fortunately, COVID-19 cases, hospitalizations, and positive test rates in the U.S. appear to have rolled over again in the last three weeks. On July 24th, the number of new cases reported by the Centers for Disease Control reached a new peak of 74,818 and the 7-day average reached 66,960. As of Thursday, August 13th, those numbers had fallen back to 52,799 and 52,927. Of course, these numbers bear watching for further declines or a plateauing effect. Hot spots have naturally shifted regionally and acted independently due to travel and differences in policies, precautions, and behaviors.
The downward trend is important after the resurgence in case counts along with inevitable downshifts in re-opening phases cast doubt on the potential for a “V” or even “U” shaped recovery. The economy has proven resilient by most measures including spending, housing, and even the job market, recently. If the threat of the virus starts to recede, businesses and consumers could drive further recovery efforts. Along those lines, we received a few pieces of economic data this week that showed improvement.
1) On Monday, the Transportation Security Administration (TSA) reported that 831,789 people passed through checkpoints at U.S. airports on the previous day, which was the highest level since March 17th. The report sent airlines (JETS ETF +4.69%), transports (Dow Jones Transportation Average +2.73%), and industrials (Dow Jones Industrial Average +1.30%) into a big day of outperformance over the broader market (S&P 500 +0.28%).
Despite the uptick, TSA traffic is still down approximately 70% from the same time one year ago. Labor unions and airline executives are lobbying for $25 billion in additional assistance to preserve more than 70,000 jobs at-risk through March 2021.
2) On Thursday, weekly initial unemployment claims came in under 1 million for the first time since March 13th (21 weeks ago). The Labor Department reported 963,000 initial jobless claims, which is still elevated compared to the 218,000 claims from one year ago, but far lower than peak claims and trending down. Continuing unemployment claims also fell, as 15.5 million people continued claims compared to 16.1 million during the previous week. Both figures beat economists’ expectations of 1.1 million initial claims and 15.8 million continuing claims.
3) And, on Friday, the U.S. Census Bureau released July’s Retail Sales Report, which showed that seasonally adjusted annualized rate of sales in July hit a new record high. Amazingly, after the last record high in January, it only took 5 months until U.S. consumers returned to their pre-COVID spending levels. For comparison, during the last recession, it was 40 months between the original high in retail sales in November 2007 and the next record high in April 2011.
How is that possible? Direct stimulus payments, Payroll Protection Program loans, and federal unemployment benefits helped weather the storm and keep personal income levels steady. Meanwhile, spending categories have shifted from bars & restaurants, gas stations, and clothing to e-commerce, groceries, building materials, and sporting goods.
The Federal Reserve Bank of Atlanta’s GDPNow model estimates that real GDP growth (seasonally adjusted annual rate) in the 3rd quarter will be +26.2%, which is up from +20.5% from the prior week. Also, the Federal Reserve Bank of New York’s Weekly Economic Index (WEI) is implying a +17.0% 3rd quarter GDP growth rate. Both of these high frequency measures of economic growth are pointing to a big bounce off of the lows of the 2nd quarter contraction of -32.9%.
Debate on another coronavirus relief package resulted in a stalemate and Senators recessed until September 8th. House Representatives had already left Washington and are not expected back until September 14th.
Treasury Secretary Steven Mnuchin and White House Chief of Staff Mark Meadows had been negotiating with House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer until talks started breaking down last week. There was a wide gap between the total amount of stimulus relief. House Democrats passed a $3 trillion bill in May but offered to reduce it to $2 trillion. Republicans had expressed their desire to cap additional stimulus at $1 to $1.3 trillion.
Beyond the top-line figure, the two sides never resolved how much weekly unemployment benefits would be, how much money to give state and local governments, or how to address Senate Majority Leader Mitch McConnell’s red line of liability protections for businesses that reopen.
Maybe the biggest consequence is the lapse of the $600 per week in federal unemployment benefits at the end of July. JPMorgan Chase Institute notes, “unemployment insurance, at its current unprecedented scale and level, is not only insuring households against the hardships associated with job loss but also stimulating aggregate demand.” There should be a cost to those record retail sales numbers noted above as well as overall economic output.
President Donald Trump issued an executive order last Saturday to provide $300 per week in federal unemployment benefits with an opportunity for states to add another $100 per week for up to a total of $400 per week in expanded unemployment benefits. It may take another two weeks to get the payments in process, but they should provide a bridge until Congress passes additional relief.
While the Federal Reserve has flooded capital markets with cash and provided lift to asset prices, it is Congress’ job to flood consumers with cash in compensation for forced unemployment. The next few weeks will let us know if they are up to the task.
Have a great Sunday!
Timothy W. Ellis, Jr., CPA/PFS, CFP®
Senior Investment Strategist, Wealth Strategist