While local lockdowns remain concerns (for example TX & FL), a renewed national/global restriction due to the virus is not the base case. So, from depressed levels, we are seeing some very large economic growth rates.
Global PMI measures continued to bounce in June. U.S. new home sales rose +16.6% m/m in May. Durables orders increased +15.8% m/m. The NY Fed’s tracking index of weekly data continues to turn up.
U.S. consumer spending cuts look to have occurred at the upper-end of the income distribution in 2020, driven by an increase in savings. The reduction in high-income spending led to lower-income job cuts. Currently, fiscal policy is making up this gap, plus some more. The consensus for nominal disposable personal income (despite recent job loss & continuing claims at 19.5 million last week) is +2.2% y/y in 2020 and +2.6% in 2021. The fiscal boost has been reflected in a surge in M2 money supply.
U.S. disposable personal income in 2019 was $16.4 trillion, so every 1% increase in the trend saving rate (saving/DPI) means -$164 billion less for consumer outlays. The consensus decline in 2020 consumer spending is -6% y/y, with a +6.1% bounce-back in 2021. This would imply a personal saving rate of 15.4% in 2020 and 12.7% in 2021.
The U.S. saving rate in 2019 was 8%, but it rose to 32.2% in April and was still 23.2% in May. So, the consensus estimates can work if: 1) fiscal policy continues to support income (more work to do); and 2) the trend saving rate settles less than +5% points higher (more work to do). Consumer confidence data remains key for assessing the situation in a timely fashion. There’s a clear uptrend (eg, the U of Mich measure at 78.1 in June) but there’s more to go for a recovery.
Given that the confidence hit was most acute (and least patched) at the upper-end of the income distribution, we are also watching for secondary implications of the pandemic. The worst of the economic hit/lockdown could be over. But the COVID-19 shock has been global, and is likely to extend (U.S./China relations have been affected, as have China/Hong Kong issues, euro-area politics, U.S. state budgets, and the November U.S. election). Any resumption of activity, helped by government transfers, will look like a “V” for a short period. But it will be difficult to get back to 2019 levels of GDP in a socially-distanced world, and we are still digesting that demand destruction. Energy capex, rent payments, and state & local govt jobs are still at risk.
Source: First Trust
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments
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