“Strange how paranoia can link up with reality now and then.” - "A Scanner Darkly" by Philip K. Dick
“Beat the virus, save the economy” has been a common theme for this column the last few weeks. With that, it’s only fair we start out our weekly commentary with a virus update. Here is our preferred way of showing COVID-19 trends: positive test rate by when a state began reopening, defined as meeting a minimum threshold of restaurant traffic.
The good news is that the earliest opened states are now seeing declines in virality. The bad news is the states that followed remain on an upward track, almost exactly in line with the earlier openers. Some additional good news is that the more recently reopened states, for the most part, seem to have taken notice of these early “case study” states and have been quicker to shut down activity before the virus surge got out of hand, with cases flattening at lower rates.
Goldman Sachs, via CNBC anchor Carl Quintanilla via Twitter (yes, we’re third-hand sourcing here) provided us with perhaps the best visualization of the re-closing of the economy, which shows that 80% of states are now either reinstating restrictions or have put reopening plans on hold.
You can see from the chart in the link that reopening plans hit a peak going into June, which not surprisingly coincided with some really good June economic data. The strong June nonfarm payrolls numbers come to mind. And last week saw releases of more big U.S. data points for the month of June: retail sales and the consumer price index. Let’s get into the data to see if the strong June numbers continued.
Retail sales figures were the most encouraging, rising 7.5% during the month and looking like a true V-shape recovery from February. In fact, retail sales are now higher year over year, up 1.1% from June 2019, a huge milestone for stores trying to stay afloat. The chart below breaks out retail sales by category for the months of March in red, April in blue, May in green and June in yellow, along with the total change since February show by the line.
As noted by our colleagues, it appears that households are shifting their spending away from services and goods that need a lot of face-to-face interaction to purchase (i.e., restaurants and clothing). They are increasingly performing those services themselves (note spending at auto-parts and building-materials stores, as well as food purchased to be cooked at home) and buying goods from online retailers (hey Census, you spelled Amazon wrong). The sectors on the left side of the chart have been rising in recent weeks, but given how large the March and April declines were, they are in no mood to celebrate.
Note that store-closure announcements were accelerating in the past week. The V-shaped recovery in retail sales isn’t a big enough V for all retailers. Retail sales have been an encouraging bright spot for the economy, but it’s hard to understate the role that fiscal stimulus programs have played in the recovery. Quick, back-of-the-envelope math suggests the total impact of the extra $600 of weekly additional unemployment benefits is $19 billion — per week.
Considering that low-income workers have been disproportionately affected by the lockdown and make up a high percentage of those receiving that extra $600, the marginal propensity to spend that money is undoubtedly very high. Let's do some more math. Retail sales in June came in at a seasonally adjusted $524.3 billion, up from a low in April of $412.8 billion. That's $111.5 billion higher in two months, or nearly $14 billion per week. Coincidence?
Let’s consider the fact that the extra money also prevented quite a few evictions to be a bonus. We all acknowledge 2020 is a unique, noneconomic circumstance: Why should people be penalized for that?
The issue now at hand is that these benefits appear to be at risk of going away before the economy gets back on its feet. Reportedly, the price tag for continuing them is a payroll tax cut, a shockingly tone-deaf development at a time when more than 30 million remain unemployed.
On that front, jobless claims came in at 1.3 million last week, stubbornly refusing to drop below a million per week. And once we include the Coronavirus Aid, Relief, and Economic Security Act’s Pandemic Unemployment Assistance, or PUA, program that provides unemployment benefits for gig workers and the self-employed, that weekly total goes to over 2 million new claims per week, roughly unchanged since June 6. The chart below looks at all weekly claims activity for both traditional and PUA unemployment (note that continuing claims is delayed by a week, and PUA continuing claims are delayed by two). Adding these all together gets us to a stunning 34.8 million, only slightly below the 35.3 million peak a month ago.
This is frustratingly slow progress for the labor market. And we don’t think it’s a coincidence that the improvement has seemingly stalled as we moved through the month of June, as the number of COVID cases ramped up and as various states began to scale back reopening plans and shut back down.
Two of our favorite high-frequency indicators for the economy have been flashing warning signs over the last few weeks. First, data from the Harvard-based economic research and analytics shop Opportunity Insights on consumer spending indicates that spending hit a peak in late June and has been flat since through July 8. Second, data from time sheet software provider Homebase on small business hiring shows that the impressive job gains we saw from the April bottom have slowed to basically zero growth during the last few weeks of June. We look at both of those in the chart below, with some useful annotations.
We’ve still got a ways to go before July is over, but it seems that the economic momentum that has driven this V-shaped recovery since April is fading fast. And the fact that we’re debating an extension of emergency benefits meant to aid the recovery when the emergency isn’t over and we haven’t recovered is baffling.
We plan to take a deeper dive on CPI inflation data next week, but just note that it came in stronger than expected at 1.2% (for example, food and energy). It will be interesting to see what the Federal Reserve’s response might be to higher-than-expected inflation in June.
To segue into the other data releases from this week, the June consumer price index also relies on the last point above. CoStar’s latest base case shows a 2.5% drop in multifamily rents over the next year, which could spell trouble for inflation, since housing costs represent a whopping 42% of Core CPI. “The Fed should not even consider a rate hike until inflation is above 2%,” noted Philadelphia Fed President Patrick T. Harker.
“Research suggests that refraining from liftoff until inflation reaches 2 percent could lead to some modest temporary overshooting, which would help offset the previous underperformance,” echoed Fed governor Lael Brainard. The federal government could learn a lesson here from its colleagues at the Fed about how to tie stimulus to improvement in the data.
The Week Ahead … As if you couldn’t tell, we are keenly awaiting details of a new stimulus bill, which will continue to be refined next week. Aside from that, there is little economic data on the slate, a welcome reprieve for those taking summer vacations. Come back quickly, though, as the week following will be a barnburner. Between the unemployment boost expiring, July will also close with a Fed meeting and the first estimate of gross domestic product for the second quarter. The latest forecast is for a record (by several times) decline of 34% on an annualized basis, but all acknowledge a wide range of potential outcomes given the unprecedented degree of change. We plan on writing about that and potential Fed decisions next week, where a consensus appears to be growing around more direct forward guidance.
CoStar Economy is produced weekly by Robert Calhoun, managing director and senior economist, and Matt Powers, associate director of CoStar Market Analytics in New York City.