Real-Time Economic Chartbook...clients following through (completed transactions). DEMAND FOR U.S. GOODS HAS STABILIZED Most current data released on 08/26/2020 Orders for nondefense

Economic ChartbookQ3 2020

Topics DiscussedQ3 2020

Growth & ProductivityPages 3-5

Labor MarketPages 6-13

Sector ActivityPages 14-17

Small BusinessPages 18-21

HouseholdsPages 22-26

InflationPages 27-29

Financial MarketsPage 30

Monetary PolicyPage 31

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GrowthQ3 2020

The NBER officially dates economic cycles in America and it has declared that the current recession began in March 2020, in turn ending the the longest expansion in modern U.S. history (July 2009 – February 2020).

THE END OF AN ERA

Most current data released on 08/01/2020

The average recession during the past century has lasted roughly 13 months in duration (11 months post Great Depression). Given the unique nature of this downturn and the unprecedented support from the government, this current recession could easily be much shorter in duration, although how quickly we fully return to pre-pandemic levels of activity remains unknown.

A QUICKER RECOVERY


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GrowthQ3 2020

U.S. GDP collapsed in H1 due to the lockdowns and other efforts to stem the spread of COVID-19. Rolling lockdowns or even lingering virus concerns that weigh on consumer demand could slow the recovery, but incoming data still suggest that the rebound remains set to continue disappointing the “gloom & doomers.”

AN UNPRECEDENTED ECONOMIC HIT


The initial recovery has been swift in part because this was a forced recession (lockdowns), unlike traditional ones caused by a build up of imbalances. Significant fiscal and monetary support have obviously helped as well, but the pace of recovery may cool going forward without an additional relief package, infrastructure investment, or other growth initiatives.

WHAT TO EXPECT GOING FORWARD


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ProductivityQ3 2020

Productivity growth surged in Q2. This is not surprising since companies in response to the economic hit of the lockdowns were likely to keep their highest-producing workers on the payroll, while also learning to adjust their operations to do more with less, i.e. raise productivity.

OUTPUT-PER-HOUR HAS JUMPED


With more people telecommuting due to COVID-19 the jump in output-per-hour could also be a sign that many workers truly are more productive while working from home. Moreover, if there were massive WFH costs to productivity we would expect to see companies rush people back into the office. That does not appear to be happening, and in fact quite the opposite.

THE WORK-FROM-HOME BOOST?


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Labor MarketQ3 2020

In March and April enough job losses occurred to more than wipe out all of the job creation that occurred during the previous 10+ years worth of economic expansion. Through August, though, over 10 million (48%) of these losses have already been recouped.

A DECADE OF EMPLOYMENT GROWTH ERASED


Joblessness unsurprisingly spiked during the lockdowns, but with the economy having now largely reopened and companies continuing to bring workers back on the payroll, the unemployment rate should further come off April’s peak in the months ahead.

UNEMPLOYMENT IS FALLING


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Labor MarketQ3 2020

The pace of rehiring may slow going forward as some types of businesses still have occupancy restrictions that force them not to be able to rehire all of the workers they let go earlier this year, and more generally many firms will be reluctant to quickly rehire every worker until customer demand returns to pre-pandemic levels.

STILL A LONG WAY TO GO


The relatively slower rebound in job openings when compared to hirings confirms that the $600 week boost in unemployment insurance has yet to meaningfully disincentivize the job search, i.e. most Americans are smart enough to prefer longer-term job security over a short-term easy income source.

DOING LESS NOW MEANS DOING MORE LATER


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Labor MarketQ3 2020

The UI boost is indeed substantial, though, and will therefore eventually need to be removed, preferably gradually over time as the unemployment rate falls further and the risks of a deflationary consumer demand shock continue to fade. Back-to-work bonuses and other policy initiatives are also being explored in Washington.

JOB SEARCH INCENTIVES


We have seen a sharp rebound in voluntary separations (quits) lately, as many Americans emboldened by stronger household balance sheets have opted to look for better job opportunities, such as paid time off that could be highly desirable during another viral outbreak (lockdown) in the future. Again, though, the level of quits occurring remains well below pre-pandemic levels.

LABOR SUPPLY TO REMAIN TIGHT


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Labor MarketQ3 2020

For over a year prior to the pandemic there were regularly more job openings than out of work Americans. Currently, though, there are roughly three job seekers for every available vacancy, a sharp improvement from nearly 5:1 in April but still well above pre-COVID levels.

FEWER OPTIONS FOR JOB SEEKERS


A similar pattern can be seen in the labor force participation rate, where the economic disruptions of the virus and related lockdowns erased a lot of the progress made in the previous years. Prime-age employment, though, has encouragingly held up relatively well.

FLOWS IN AND OUT OF THE LABOR FORCE


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Labor MarketQ3 2020

Older Americans have seen one of the largest declines in labor force participation this crisis. This is in part due to their greater health sensitivity to COVID-19 and often relatively lesser ability to telecommute during the lockdowns, in turn also helping explain the spike in forced early retirements seen this year.

RETURNING TO WORK LESS LIKELY FOR SOME


As for those who can work from home, they have generally weathered the pandemic shock quite well. Women in particular have benefited from the WFH shift, with a higher likelihood of being able to work remotely seen across all age groups this crisis.

WOMEN GAIN FROM REMOTE WORK


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Labor MarketQ3 2020

Educational attainment also appears closely linked to one’s ability to work remotely, and the higher the degree the more likely a person is to have been able to telecommute this crisis.

HIGHER EDUCATION = HIGHER WFH LIKELIHOOD


Recent joblessness trends clearly show that a higher degree of educational attainment can help shelter one from an economic downturn. When unemployment does occur in higher education groups, though, it can last longer, e.g. it is much easier for a retail worker to find another local retail job than for a nuclear engineer to find another nearby nuclear engineering job (supply).

COLLEGE CLEARLY WORTH THE INVESTMENT



Labor MarketQ3 2020

Regional employment differences have also been present this crisis. Month-to-month differences are due to fluctuations in positive COVID-19 cases, but throughout the pandemic the labor hit has been much less severe through much of the Sunbelt.

WINNERS


Some states have also seen joblessness increase even as they have appeared relatively sheltered from the “second wave” of the coronavirus, such as New York, which saw its unemployment rate actually climb to a record high in July.

AND LOSERS



Labor MarketQ3 2020

The headline average hourly earnings figures released each month have been very noisy recently due to the unique circumstances of the crisis, i.e. most of the job losses have occurred in traditionally low-paying sectors, so average compensation metrics look overly positive since it has been mainly higher-earning individuals who have been able to keep their jobs.

HOW HAS WAGE GROWTH FARED?


The Labor Department’s economic cost index is less sensitive to such distortions and encouragingly suggests that wage cuts so far this crisis have not been as rampant as many economists had feared. It is even easy to imagine a scenario where wage growth is back over 3 percent by this time next year, save another COVID-19 flare up or some other exogenous shock.

WHAT TO EXPECT IN 2021



Sector ActivityQ3 2020

Popular gauges of national manufacturing activity have bounced back quickly. Surveyed business leaders still express what at best can be described as cautious optimism, but the outlook has undeniably improved considerably compared to the sentiment seen in March and April.

ANOTHER INDUSTRIAL RECESSION AVERTED?


The Federal Reserve’s various regional manufacturing gauges confirm that the rebound in activity has occurred across the whole country, although some states again do appear to be outperforming others.

A BROAD RECOVERY




“Hard” data on actual output have also been encouraging, albeit a bit less so than the “soft” survey data from the previous page would suggest. Regardless, purchase orders are still being placed, which firms would not commit to if they did not have confidence in clients following through (completed transactions).

DEMAND FOR U.S. GOODS HAS STABILIZED


Orders for nondefense capital goods ex-aircraft, an important proxy for U.S. business spending, have also started to rebound, and any further momentum here would be a great sign for the broader economic recovery.

CORE CAP-EX TRYING TO REBOUND?




The rebound in factory output has also been supported by recent industrial production data, but again the numbers remain well below pre-pandemic levels. This is the reoccurring theme of the overall economic rebound, i.e. the incoming data continue to disappoint the pessimists but at the same time we still have a long way to go before any kind of “victory” can be declared.

ANOTHER RECOVERY CONFIRMATION


Capacity utilization, often used as a leading indicator of inflation and potential output, has stabilized at a level that suggests rapidly rising prices are unlikely to be a problem any time soon, meaning the economy can continue to improve for a while before any risk of overheating starts to arise.

AN ENCOURAGING DEVELOPMENT




The service sector accounts for a much larger share of economic output than manufacturing, and it has encouragingly also rebounded considerably. Moreover, this continued improvement comes even as the second wave of the coronavirus was making its way through the country and some establishments have been limited by lingering occupancy restrictions.

SERVICE SECTOR IS EXPANDING ONCE AGAIN


Construction spending has experienced much less of a rebound than other areas of the economy as many firms reassess plans to commit to investments in new office space and other areas until more certainty about the pandemic’s effect on their operations is available. Very low housing supply, though, bodes well for residential construction going forward.

WEAK SPOTS REMAIN



Small BusinessQ3 2020

Small business owner optimism, as measured by the NFIB, remains well above where just about anyone (outside of our blog readers) thought it would be four months ago, and even after a slight pullback in July the headline index remains roughly in line with the survey’s historical 46-year average.

SMALL BUSINESS OWNERS EXHIBIT RESILIENCE


Despite millions of unemployed Americans, filling job vacancies remains very challenging for small businesses. Many firms have responded by raising compensation even as the economy has yet to fully recover. Investments in enhanced benefits and remote work capabilities, though, may provide a better return in the years ahead.

LABOR QUALITY REMAINS A PROBLEM




Compared to large corporations, smaller firms have experienced a sharper economic hit from the coronavirus and related containment efforts, but their nimbleness and flexibility have also enabled many of the smallest of firms (50 or fewer employees) to see a swifter recovery. The PPP has of course helped as well.

A FASTER DECLINE BEGETS A FASTER REBOUND


Although employment has rebounded, total payrolls remain well below pre-pandemic levels, and the pace of rehiring is likely going to ebb and flow with the rebound in customer demand.

ONLY HALFWAY THERE




The PPP and other government support provided a crucial lifeline for small business this crisis, but many firms still struggled to survive. Encouragingly, despite an uptick in bankruptcies the American entrepreneurial spirit appears alive and well, as evidenced by the steady uptick in new business applications, including companies with a high likelihood of creating jobs.

BUSINESS DYNAMISM


The sharp increase in business applications has occurred across the entire continental United States. Regional differences can again be seen but this time it is likely more related to the types of industries that dominate a state and how sensitive they were to the lockdowns.

WIDESPREAD BUSINESS FORMATION GAINS




The crisis-related hit to small business borrowing has been much smaller than what occurred during the previous economic downturn, and already demand for credit appears to be rebounding, another sign of improving owner confidence.

CREDIT DEMAND HAS STABILIZED


Delinquency rates have unsurprisingly increased but they remain in the single-digits and well below what was seen during the Great Recession, suggesting that the vast majority of small businesses are not having a difficult time staying current on their loans.

A STRONGER FINANCIAL FOOTING



HouseholdsQ3 2020

Consumer credit conditions have also strengthened, as evidenced by the broad declines in delinquency rates. This is thanks in large part to foreclosure moratoriums, student loan forbearances, and other crisis-related relief.

LESS HOUSEHOLD BALANCE SHEET STRAIN


Incoming data suggest that Americans who lost their job used their $1200 relief payment and other financial support from the CARES Act to stay current on their bills if they experienced a job loss, and those who stayed employed used the extra income to pay down debt, which if can be maintained will help them be better prepared for another crisis down the road.

SMART FINANCIAL MOVES



HouseholdsQ3 2020

Household net worth as a result of the pandemic-related economic disruptions experienced its first year-over-year decline since the Great Recession, but the setback is likely to be transitory.

AMERICANS’ WEALTH TAKES A BRIEF HIT


Despite the backdrop of millions of unemployed Americans, household net worth should actually start rising again, and it may even soon reach a new all-time high because the stock market is also back to record levels, and home values, the largest asset for many households, have in many areas of the country also risen compared to pre-COVID levels.

A PARADOX OF THIS ECONOMIC CRISIS



HouseholdsQ3 2020

Despite the positive developments mentioned earlier, consumer sentiment gauges have experienced a much more muted recovery. The constant influx of negative news headlines (and general ignorance of the broad economic improvements) has likely not helped, e.g. coronavirus second wave, civil unrest, political tribalism, etc.

CONFIDENCE HAS AT BEST STABILIZED


Americans remain optimistic about the future, but still less so than prior to the pandemic. The hit to near-term confidence has been even greater due to the uncertainty still surrounding job security and the upcoming elections, among other things. Going forward, though, sentiment should improve along with the economy and our fight against the virus.

UNCERTAINTY CLOUDS THE OUTLOOK



HouseholdsQ3 2020

Despite the lackluster sentiment rebound, Americans have not displayed any reluctance to spend throughout the crisis. In fact, retail sales have already exceeded the pre-pandemic peak. This should not be too surprising because even though millions of Americans are unemployed, the vast majority kept their jobs and received a $1200 “windfall.”

A V-SHAPED RETAIL RECOVERY


Americans spent significantly more on groceries to cook during the lockdowns, while spending away-from-home, such as dining out at restaurants, collapsed. The reversal of this trend has been sluggish even four months into the reopening because many occupancy restrictions persist, and some consumers may simply be reluctant to dine out regularly until there is a vaccine.

CHANGING HABITS



HouseholdsQ3 2020

Ahead of the pandemic Americans were already doing a larger share of their shopping online, but it appears that this trend away from brick-and-mortars has been kicked into high gear as a result of the lockdowns, and some consumers may not be in any hurry to switch back (and the local shops they used to patron may no longer be there).

ACCELERATING TRENDS


Another sign that consumer spending has not been hit by the 2nd wave of the coronavirus is the incomingmobility data that show Americans’ general level of driving had been mostly stable, even in the recent “hot spot” states. This bodes well for away-from-home spending, and perhaps not well for online commerce, at least in the near-term.

MOBILITY DATA REMAIN ENCOURAGING



InflationQ3 2020

During the early stages of the crisis, deflation was the main risk, and although we are not completely out of the woods yet, inflation now seems more likely. However, any kind of meaningful price increases are unlikely to show up any time soon as the pace of the economic recovery starts to moderate (at the very least due to base effects).

INFLATION, DEFLATION, AND DISINFLATION


The Federal Reserve’s preferred inflation gauge (the PCE deflator) appeared ready to finally take out the committee’s 2% “target” prior to the pandemic, but now this achievement seems a long way off. Further, officials may switch to a symmetrical target going forward, meaning that the Fed will allow inflation to run “hot” for a while as the economy continues to recover.

AVERAGE INFLATION TARGETING



InflationQ3 2020

Although there have not been widespread price increases, some components of the economy have indeed continued to get more expensive, such as the cost of medical care, which appears set to once again easily outpace the cost of living adjustment (COLA) Social Security recipients will likely receive next year.

INFLATION IS NOT COMPLETELY GONE


Rents have fallen but not nearly as much as we saw during the previous recession. In fact, some regions have seen rents rise compared to pre-pandemic levels, whereas declines have been concentrated in cities harder hit by the virus that also seem less attractive now due to

SHELTER COSTS HAVE NOT COLLAPSED



InflationQ3 2020

It has remained a sellers market in residential real estate because the only thing that would put downward pressure on prices in the near-term is a sudden flood of supply, which has not occurred in part because most of the job losses have occurred among likely renters, and significant foreclosure protections have also been implemented during the crisis.

SUPPLY AND DEMAND


Prior to the pandemic residential home prices by some measures were already looking elevated, but unlike in the 2002-2008 period, Americans have much stronger balance sheets this time (less levered). The main unknown going forward is whether Millennial and Gen-Z home-buying demand will meet the supply created by aging Baby Boomers.

ANOTHER BUBBLE?



Financial MarketsQ3 2020

Helped by unprecedented monetary and fiscal support, improving coronavirus headlines, and a constant influx of better-than-expected economic data, the latest bear market for equities has been the shortest on record. However, stocks have been under pressure the past few days. So far this seems like healthy profit taking ahead of elevated election risk.

STOCKS FOR THE LONG RUN


The stock market has been an excellent predictor of trends in service sector employment, and although the relationship has been thrown a bit off kilter due to the unusual nature of the COVID-19 recession, the recent all-time highs in equities are yet another reason to believe the labor market recovery will continue in the months ahead.

THE OUTLOOK REMAINS BRIGHT



Monetary PolicyQ3 2020

The Federal Open Market Committee slashed the target range for the fed funds rate to 0.00% to 0.25% to help financial markets continue to function during the coronavirus crisis. Even if conditions deteriorate it is unlikely the Fed will experiment with negative rates because policymakers have several other tools they could explore prior to such a move.

ZIRP REMAINS UNLIKELY


The committee’s latest “dot plot” confirms that the Federal Reserve is also unlikely to raise interest rates any time soon. If anything the FOMC will slowly “prepare” markets and the economy for rising rates with lots of commentary long before the first hike actually occurs. Average inflation targeting is also likely to be announced well ahead of the next rate inflection.

LOW RATES FOR FORESEEABLE FUTURE



Documents

Real-Time Economic Chartbook...clients following through (completed transactions). DEMAND FOR U.S. GOODS HAS STABILIZED Most current data released on 08/26/2020 Orders for nondefense