V-Shaped Rebound…So Far - July 20, 2020

Let’s review two important economic reports: retail sales and industrial production.


The Covid-inspired lockdowns began in March, as reflected in retail sales and industrial production. The full effect was felt in April, as both metrics declined at a record pace.

As businesses reopened, economic activity has surged. Retail sales posted a record advance in May, and both May and June’s numbers easily topped forecasts (Econoday).

Retail sales in June are up 1.1% versus a year ago and are nearly back to January’s pre-Covid high. More impressively, auto sales are up 7.5% versus a year ago and hit a record high in June. In part, pent-up demand and a shift away from mass transit appear to be lifting auto sales.

Nonetheless, a note of caution is in order. Can pre-Covid retail sales coexist with high unemployment and historically high layoffs? Generous jobless benefits help (though they are a disincentive for some to return to work), but sustained job growth and a significant drop in layoffs are needed to power consumer spending longer term.

While its rebound has been impressive, the industrial base has been slower to get cranked back up. Still, industrial production has recovered about one-third of its decline in two months, and manufacturing production has erased nearly 50% of its decline.

So far, we’re experiencing a V-shaped rebound that few thought possible, as businesses reopen, stimulus money is spent, and furloughed workers are recalled.

Clouds gather

The Wall Street Journal reported on Friday that daily Covid cases hit a new high of more than 77,000. Anecdotal reports suggest that hospitals in some locales are feeling the strain. Deaths have yet to spike but are showing signs of inching higher.

Regional manufacturing surveys in July have been encouraging. However, high-frequency economic reports (weekly, daily) including TSA airline travel, hotel occupancy (STR), restaurant bookings via OpenTable, Apple Map searches, and business foot traffic (SafeGraph) suggest economic progress has slowed this month.

While a surprise for some, major stock market averages have held up well, despite unsettling headlines.

Reasons likely include—

  1. Backtracking on reopenings hasn’t led to new national lockdowns, and high-frequency data have plateaued but not fallen.
  2. Daily deaths have ticked up but have not spiked along with new cases.
  3. Investors may view the spike in new cases as temporary.
  4. The Federal Reserve stands ready to provide additional economic support if needed.
  5. News of progress on a possible vaccine has aided market sentiment.

Economic data have been encouraging over the last two months. St. Louis Federal Reserve President James Bullard, who has been more optimistic than most of his colleagues at the Fed, said stock market optimism has proven to be right, at least so far (MarketWatch).

That said, let’s not rule out the possibility of more volatility as the economic outlook remains extraordinarily uncertain. The path of the virus and its psychological impact on our spending and behavior outside the home will have a big influence over economic activity as the second half of the year unfolds.