An Economic Recovery Or An Illusion?

The final June University of Michigan consumer sentiment report showed the overall confidence index fell from the preliminary reading of 78.9 to 78.1. It was still up from 72.3 in May, but investors want to see continued increases. Investors follow the rate of change which means whenever anything falls back, it’s cause for concern. The economy can’t afford to slip backwards because the recovery up until this point has only gotten the data from depressionary to recessionary. The economy is still very weak. Stalling out now would be a disaster. In early June, euphoric investors started to think we would see a quick V-shaped recovery. That was idealistic because COVID-19 is unpredictable and the economic recovery is highly reliant on fiscal and monetary stimulus which could go away or prove to be ineffective. Finally, the election is an added risk to the stock market.

The issue with the slight decline in the final reading from the 1st half of June survey is it supports investors’ worst fears. It jives with the latest news on COVID-19. We are seeing huge spikes in cases in some states in the south and the west which has caused states such as Florida and Texas to halt their reopening plans. Just 2 weeks ago we heard from the optimists that there was no way the economy would shut down again. We countered that even if it doesn’t shut down, people will take precautions. Even if people aren’t dying in as large numbers, most people will want to avoid getting sick and the possibility of ending up in the hospital.  

The current conditions and expectations indexes rose from 82.3 and 65.9 to 87.1 and 72.3, but the highlight of this report was the breakdown by region. The changes in confidence were correlated with the spikes in cases. Since we have seen an increase in cases in the hot spots since this survey was done, it’s possible sentiment in those areas weakened further. Specifically, in the south sentiment only increased 0.5 which pushed it from the 2nd most confident region to the least confident region. Obviously, Texas and Florida are facing a major crisis which has only worsened in the past few days. It’s probable in the past few days, consumer spending in those areas fell. In the west, the index only rose 3.3 points as it went from the 1st to 2nd most confident region. Arizona and California are the states with the biggest issues in this region.

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