08 Jul Lazar Cartu Publishes: The Economy’s Second-Quarter High Might Turn into a Third-Q…
The U.S. economy ended the second quarter on a high note with 4.8 million jobs created and the Conference Board’s consumer confidence index up 12.2 points.
It seemed as if the measures taken in the spring to slow the spread of the coronavirus worked, and states and localities began reopening bars, restaurants, gyms, hair salons and other places where consumers could once again spend money. Bars and restaurants alone accounted for 30% of the job gains in June.
Photos: States Pause Reopening
The reopenings provided economic relief to many industries. Hotel occupancy, which had dipped to 24.5% percent in April rebounded to 46.2% by the third week of June, according to global hospitality data firm STR. Fewer than 90,000 people moved through airline security checkpoints in mid-April, but last Sunday more than 732,000 people were checked, according to the TSA. Restaurant reservations are off about 60% now, but that compares to a drop of nearly 100% in April, according to OpenTable.
But, it now appears the doors may have been opened too soon and too fast. Within a month of Memorial Day, states were reporting record numbers of new cases that, even allowing for increased testing, suggest the virus is more resilient than ever. In response, officials have paused their reopenings, closed bars and other establishments to slow the spread of COVID-19.
That means the economy will once again face enormous headwinds, even though governors in the largest states say they will not impose lockdowns again. The fate of the economy now hinges squarely on the willingness of consumers to spend amid a pandemic that shows no signs of slowing its march across America.
The changed landscape led Goldman Sachs on Monday to lower its forecast for third-quarter growth in U.S. gross domestic product to 25% on an annualized basis, down from a prior 33% rise.
“The sharp increase in confirmed coronavirus infections in the US has raised fears that the recovery might soon stall,” Jan Hatzius, Goldman’s chief economist, wrote in a note. “Although a significant part of the increase reflects higher testing volumes … a broader look at the CDC criteria for reopening shows that not only new cases but also positive test rates, the share of doctor visits for covid-like symptoms, and hospital capacity utilization have deteriorated meaningfully in the last few weeks.” And Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in an interview with the Financial Times on Monday that the economy was “levelling off.”
“There are a couple of things that we are seeing and some of them are troubling and might suggest that the trajectory of this recovery is going to be a bit bumpier than it might otherwise,” Bostic said. The regional central bank was trying to understand “whether this levelling off is something that is a more sustained pattern, or just a pause.”
GDP fell 5% in the first quarter, as the nation closed for business. It was the largest one-quarter drop since the final quarter of 2008 as the Great Recession raged.
The role of the consumer to spark the economy and, indeed, to keep it humming cannot be overstated with consumer spending accounting for roughly 68% of GDP. And with state and local government budgets hit hard by spending on the pandemic, little relief can be expected from that sector.
A worrisome picture emerged Wednesday from a Bankrate.com survey, which found Americans planning to spend “less” or “much less” on such activities as going to the movies, dining out or attending a concert. The survey was completed in mid-June, before the latest round of closures and mandatory mask orders.
“People just don’t feel comfortable going out to movies, sports events, theatres, concerts and dining out,” says Ted Rossman, industry analyst at creditcards.com.
Conversely, the survey found that people said they intended to spend more on child care, housekeeping and charity. Rossman notes that the pandemic has created economic winners and losers, with sectors such as home improvement and online grocery shopping booming. But, he adds, “Travel remains very depressed,” with airline spending off 80% from year-ago levels.
JP Morgan Chase, which has more cardholders than any other financial institution, monitors spending by credit cards on a daily basis over a seven-day moving average, meaning it captures any increase or decrease almost immediately. On June 28, Chase noted a drop of 0.2% from its prior reading and a 3.5% drop over the seven days.
The tracker registered a 40% drop in activity at the end of March from 2019, but it had rebounded significantly to a high in mid-June of being down about 10%. The latest reading is down 13.1%.
Political Cartoons on the Economy
Just how the coming weeks and months play out for the economy is very much uncertain. When the coronavirus first took hold in the U.S. in late February, the government responded with massive stimulus, including aggressive monetary moves by the Federal Reserve along with the CARES Act and other actions taken by Congress. Included in the CARES Act was expanded unemployment benefits of $600 a week on top of existing state unemployment payments. But that additional help runs out at the end of the month.
Now, Congress and the White House are engaged in quiet negotiation over a potential fourth round of stimulus. Some Republicans in the Senate have balked at the idea, pointing to the robust jobs numbers in June. But Brian Gardner, director of Washington Research at Keefe, Bruyette & Woods, says he still thinks a deal by late this month or early August can get done.
“Congressional Democrats and the White House seem to be roughly aligned on wanting a larger bill, so we think a bill of roughly $1 trillion is likely,” Gardner wrote in his weekly note Monday. “The main sticking points remain liability protections for businesses that reopen and the $600 per week supplemental unemployment insurance payment which expires on July 31. We expect that the supplemental payment is likely to be converted into a back-to-work incentive payment rather than the current form which has been a disincentive for some workers to return to work.”
Rossman, for one, remains an optimist.
“People may have learned to live with less, or without,” he says. “I tend to think over the longer term, things will return to normal.”