Guest Post by Ned Davis Research
Changes in economic indicators off their shutdown levels in March and April have been encouraging. To name a few, nonfarm payrolls, retail sales, and industrial production have all rebounded in May and June and the ISM Manufacturing and Non-Manufacturing Indexes both moved back above 50. Most other economic indicators beat consensus expectations handsomely, pushing the Citigroup Economic Surprise Index to a record high level.
This is giving us confidence that the recession that officially started in February ended in Q2, with a trough in economic activity likely as early as April.
Recovery at risk?
But as positive as these data are, they are all backward looking, showing what happened last month, at best. Weekly series suggest that the economic recovery lost steam in late June/early July, as the resurgence of COVID cases across most states led to the delay or reversal of reopening plans.
Since the recession began with business shutdowns and stay-at-home orders, mobility trends gained importance for gauging how the reopening of the economy is progressing. A new Mobility and Engagement Index (MEI) from the Dallas Fed shows that mobility declined in the first two weeks of July.
Mobility trend flattens
The MEI is based on geospatial data from mobile devices, mainly how often, at what distance, and for how long people venture out of their typical location. Data is scaled so that January and February (before the lockdowns began) average zero and the minimum of the weekly averages is at -100 for the week of April 11 (presumably, the peak of the crisis).
Three observations stand out right away. First, the MEI plunged in March and April reflecting the widespread lockdowns across states. Second, the MEI has picked up significantly since April, as states reopened, but it is not yet back to normal. Third, and most telling about the outlook, is that the MEI declined in the first half of July, even without new stay-at-home orders, although some states re-imposed limitations on business openings.
This suggests that fear of the virus is the main force preventing people from reengaging in the economy. Until the health crisis is resolved either through a vaccine or an effective treatment of COVID, the recovery will be subdued.
This strengthens the case that we are in the midst of a rocky square-root or U-shaped recovery, which has been our base case scenario since late March/early April.
The recent flattening of the MEI shines an unfavorable light on the economic outlook. The flat-lining of the former suggests the recovery might also sputter in the coming weeks.
Real activity slowing
The Weekly Economic Index (WEI) from the New York Fed measures real economic activity and is a composite of ten high-frequency data series spanning consumer behavior, employment, and production. It is scaled to the y/y % change of real GDP. The two are highly positively correlated. Unlike GDP, which is usually released about a month after the end of the quarter, the WEI tracks growth in real time. It captured the upturn in economic activity at the end of the Great Recession, and later the significant slowdown in growth in 2015-16 after the collapse in energy prices.
The WEI bottomed in April, but its level in July remains lower than what it was during the Great Recession, as activity is still a long way from its pre-recession level.
Labor market slowing
Similarly, the widely followed series of initial jobless claims shows that the labor market recovery, and by extension the broad economic recovery, is losing momentum. Initial claims have declined for 15 straight weeks from the record level in late March/early April. While the peak in claims implies the recession ended in Q2, the pace of improvement has slowed and new claims continue to run above one million per week. This is still nearly double the number of claims during the worst of the Great Recession (chart at right)
Continuing claims for state unemployment benefits have also peaked, but remain sky high above 17 million each week.
Additionally, more than 14 million people have been receiving $600 per week in federal unemployment assistance, which is scheduled to end this week, unless extended in some form as part of the new fiscal relief package Congress is considering.
With the unemployment rate still at double-digits and the economic recovery stalling amid increased spread of the virus, more fiscal support is likely forthcoming. Already, our Real Monetary and Fiscal Policy Index broke records in May and June, as the chart at left shows. The index is higher than during any other recession since at least 1965. While the economy remains a victim of the virus, support from the government is preventing an even deeper recession and is laying the groundwork for faster growth once the health crisis is amended.
This content was provided by Ned Davis Research – See NDR Disclosures
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