The economy was supposed to drop off a cliff when the coronavirus aid dried up. It didn't. Here's why.
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- Economists predicted that Americans' consumption — and in turn the US economy — would fall off a cliff when Congress' coronavirus relief funds dried up at the end of July.
- But instead indicators of household consumption have generally improved, as has the news about the spread of the virus itself.
- While some people are no doubt struggling, the US economy appears to be slowly improving.
- There are still risks ahead, but this is good news.
- This is an opinion column. The thoughts expressed are those of the author.
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Near the end of July, it seemed like all signs were pointing to even more economic pain.
CNN Business reported: "The economy is once again teetering on the edge of a so-called fiscal cliff … some experts warn that consumer spending could dry up if there isn't a sufficient level of new stimulus."
It was hard not to accept the premise at the time. After all, the income support provided as part of Congress' coronavirus relief bill was set to dry up, so it made sense that consumption would suffer. The downside risk to the economy was obvious.
However, a surprising thing happened as the US economy fell off the fiscal cliff: consumers' spending strengthened modestly. Just look at the evidence:
- In August, unit auto sales strengthened to 15.2 million units annualized from 14.5 million units in July, beating consensus estimates and continuing a fairly rapid recovery off the lows.
- Restaurant spending appears to have advanced too. According to data from OpenTable, seated diners at restaurants were off about 50% against year-ago levels at the end of August, up from being off 60% at the end of July.
- Credit and debit card spending data also show sequential growth. Using one popular measure, consumption was stronger at the end of August than the start of it.
None of this is to say that consumption did not slow for those workers who saw the $600 a week enhanced unemployment insurance benefits dry up. Indeed, there is some evidence that consumption for this group fell. But, there were clearly offsetting factors.
- First, COVID-19 case growth slowed. Daily case growth fell by roughly one-third over the course of the month. The Fed has noted that "the path of the economy will depend significantly on the course of the virus." In this case, the slowing case growth has likely led to people feeling a bit more comfortable engaging in normal activities.
- Second, there remains a large pool of available savings for households to draw down. The personal saving rate is 17.8%, roughly 10 percentage points above February level. Jobless insurance benefits equal 7.6% of disposable income. While the tightening in August is large, it won't be repeated again in September.
- Third, it would be one thing if households were only drawing down saving to lift spending. That would be unsustainable. But that's not what's happening. After all, wages and salaries are back on the rise as the labor market recovers. Are conditions good? No. But, there's no denying sequential improvement. By August, we estimate that private wages and salaries will be at 96% of their February level.
Some continue to argue that a fiscal shock will reverberate any moment now, give it time, a Wile E. Coyote moment awaits or so the thinking goes. But real life is not like a Wile E. Coyote cartoon. In reality, you fall right after going over the cliff. If households just suffered a massive income shock, would they just keep on spending as if nothing has changed? Of course not!
One of the surprising data-points of late has been an uptick in consumption for those households in low-income zip-codes. People tend to base their behavior on what they see happening in front of them, and they likely see things getting better, not worse.
In short, the fiscal squeeze certainly doesn't help, but that's not the only thing happening in the economy. Take a more holistic view.
Neil Dutta
In the coming weeks and months, we continue to see offsets to the fiscal squeeze. Importantly, better news on virus suppression is pushing policymakers in some regions of the country to finally get going on the reopening of the economy. Consider the news in recent weeks:
- AMC announced that it would have over 70% of its domestic theaters open by the Labor Day weekend, albeit with seating restrictions. Note that large markets like New York City have yet to reopen.
- A number of large financial institutions have announced beefing up office attendance in the coming weeks. This will likely spill over into other parts of the economy.
- Miami recently reopened indoor dining (again) and New York City has finally green-lit indoor dining at limited capacity starting at the end of September. In New York's case, the news is welcome considering just how poorly restaurants have performed despite relatively good news on the virus front. In San Francisco, indoor hair salons, barbershops, and gyms can reopen on September 14.
The news out of San Francisco and New York is encouraging since these have been cities that have generally embraced strict lockdowns.
At any rate, it is pretty clear that the stringency of lockdowns is easing and while physical constraints on activity aren't all that matter, they certainly still matter.
Pessimists will look at the continued reopening and argue that a spike in cases is inevitable. Perhaps. Then again, while the pace of reopening appears to have picked up recently, the country has been reopening for weeks now, and cases continue to decline.
We'll err on the side of continued growth momentum. For investors, this means rotating out of those names that benefit from people sitting at home all day long and into those sectors that require some proximity to people.
Our guess is we'll see more folks at the movies in the months ahead and fewer streaming shows in their sweatpants.
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