Interpreting a COVID-Economy

Almost eight months into coronavirus-led shutdowns and limitations, it appears that most individuals have adapted to this “new normal” and way of life. Since March 2020, many Americans have experienced extreme financial market volatility, job layoffs, and asset class dislocations that rival the Great Recession of 2008. The coronavirus caused an economic slowdown that resulted in stay-at-home orders, regional and national quarantining, minimal travel, fewer leisure activities, layoffs, furloughs, forbearance periods, small business closures, and numerous corporate bankruptcies. Headlines instilled fear with pessimistic updates of increases in COVID-19 cases. Today, that fear remains following the recent outbreak in the White House. Despite lingering fear and uncertainty, everyday lives gradually started to adapt. Those employed have become used to working from home, students embraced virtual lectures, and all types of businesses shifted procedures. Considering this adaptation to the “new normal,” the U.S. economy recovered but not completely.

Last week, unemployment decreased to 7.9%, continuing its’ downtrend from 14.58% in April. Initial jobless unemployment claims remained range-bound near 840,000 since August (still above the peak in 2008), and continuing claims decreased 8.35%. However, initial jobless claims filing delays in California and the recent barrage of corporate layoffs from Disney, Goldman Sachs, Allstate, Shell, Regal Cinemas, and multiple airlines could keep these numbers elevated for the remainder of the year. This recent trend of corporate layoffs amid location closures and work from home orders could negatively impact seasonal job openings.

Although elevated unemployment persists, other areas of the economy improved. ISM Manufacturing increased to 55.4, and ISM Services rose to 57.80, rebounding off the lows in Q2 2020. Most of the Services subindexes were positive, with only imports and inventories in the contractionary territory (below 50). Furthermore, the leading economic indicator, new orders, increased to its highest level in almost 16 years. Therefore, despite the historic GDP contraction in Q2 (-32.9% annualized), the U.S. economy shows signs of resiliency as services make up over 50% of the U.S. GDP, with manufacturing making up around 10%. This recovery can be an overall positive sign for the U.S. economy’s near-term trajectory as the NFIB Small Business Optimism Index rose 3.8% to 104 (a historically high reading), Core-Producer Price Index beat consensus estimates rising to 1.2%, and Core-Consumer Price Index remains in line with consensus estimates at 1.7% (Fed inflation target at 2%).

ISM Manufacturing vs ISM Services

Bloomberg, 10/13/2020

With this said, new and existing home sales surged since March amid low mortgage rates, stay-at-home orders, social distancing, and the recent departure from densely populated cities. Year-to-date outperformance from companies such as Zillow and Redfin indirectly depicts the strength of the housing market as behavioral demand shifted amid the pandemic. Though housing can continue to see behavioral demand strength, if a vaccine is developed and distributed in the coming months, this sector’s increased demand can become muddled and level off.  

Lastly and probably the most discussed is the Federal Reserve’s quantitative easing program and the stagnant negotiations of an additional stimulus package. The Federal Reserve (Fed) highlighted the robust but imbalanced recovery of the U.S. economy in the second part of the year. The Fed also highlighted that an increased quantitative easing, through the purchase of Treasuries and Mortgage-Backed Securities, was appropriate to continue to combat and minimize lingering economic stresses. Jerome Powell, Chair of the Federal Reserve, mentioned that an accommodative fiscal policy and a stimulus package were necessary for the U.S. economy to improve. Unfortunately, an agreement on a stimulus package remains unclear as negotiations intensify and change daily. This looming cloud of uncertainty causes volatility in the stock market, but as Election Day approaches, an agreement on a stimulus package seems ambiguous. We continually monitor this development as an agreement could bode well for equity markets in the near term.

It appears that our domestic economy remains on the right path to a complete economic recovery, but essential factors still need to improve. Unemployment levels need to subside, policy administration needs to provide accommodations, and a COVID-19 vaccine needs to be developed to propel the U.S. back to pre-COVID levels. In the remainder of the year, the U.S. economy expects to expand 29.9% in Q3 and 4% in Q4, according to a Bloomberg survey of 71 economists. Housing will likely remain a winner as social distancing, and stay-at-home orders resonate. However, unemployment expects to stay elevated as delays in California filings and large mass corporate layoffs have not yet hit the unemployment numbers.

In summary, the U.S. economy recovered a long way since the historic lows in March, but there remains much-needed improvement for a pre-COVID-19 economy. This week we look forward to seeing if weekly jobless claims, retail sales, manufacturing and industrial production, and the University of Michigan sentiment follow the path to improvement.