Consumer Spending Growth Increases As States Reopen
Spending Growth Is Improving
Consumer spending growth is in a steady uptrend. That’s not surprising because the fear in late March and early April was unsustainable. There is a sense of a return to normalcy as the economy reopens. Plus, most people who applied for unemployment benefits have gotten them. Finally, the stock market has almost fully recovered which is great news for the top 50% of Americans who own stocks.
Many are curious what will happen if the government doesn’t help people after the extra $600 per week benefit expires in the end of July. That was always an unsustainable program because the government can’t pay people more to stay home than to go to work. If the government relies on hope that the jobs come back, jobless claims will fall in August.
But the economy may crater because all the people who can’t get a job will be poorer. There could be another dip in the economy as it tries to steady itself without extreme government support. This hand-off along with the possibility of a 2nd wave of COVID-19 are the biggest risks markets face.
The strength of the labor market matters more than spending because spending will crater when the government’s support ends if the labor market doesn’t improve. It’s tough to know how much of the heightened jobless claims are the result of high benefits and how much is because there simply aren’t jobs. Jobless claims are running at about 2 million per week, which is high considering that most of the economy has reopened.
It won’t be that simple for the economy to get back to normal after everything is reopened. The economy could go from a deep decline to an elongated mild decline instead of right back to normal. Many businesses can’t operate with social distancing measures in place. Plus, people aren’t going to want to shop as much as the used to if they need to wait on long lines to get in stores.
Some are taking a more negative stance because the positive stance is reinforced by the media and the stock market constantly. It’s amazing how the roles have reversed. Personally, I was a huge bull in late March and all of April, and was even bullish in the first half of May.
However, the recent spike in stocks has gotten me focused on risks more than rewards. With that being said, retail spending growth is definitely improving. Redbook same store sales growth rose from -9.5% to -5.5%. It wouldn’t be surprising to see positive growth again in June.
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Chase consumer card data isn’t as positive as Redbook, but shows the same trend towards improvement. Yearly growth rate bottomed at about -40% in late March and early April. It has since risen to -20%. The chart above breaks down the decline in spending by state. As you can see, Georgia has had a decline of just 14.5% probably because it reopened first. It’s good to see such strong relative growth because this state has the weakest labor market in the nation.
On the other hand, NY and California are the weakest as they are still partially shutdown. 2 biggest cities in America, NYC and LA, are shutdown. It has led to the declines of 20.2% and 21.2% in these states. Once those cities open, we will see an increase in economic activity. That being said, the increase in NYC might be the most tepid in the nation because it was hit the hardest by the virus.
It means officials and consumers will be cautious. You can already see the caution of officials because the city probably should already be open by now. There were only 1,050 new cases on May 27th which was the lowest since March 17th. There were 102 new deaths. Number of active cases is about to peak. It rose from 608 to 279,913.
Georgia Experiencing A Spike In New Cases
One of the biggest risks markets face is another spike in cases. There are 2 fears. First is a spike related to states opening and the 2nd is another wave in the fall. Former is a bigger risk in my opinion because there will be more treatments by the fall and we will be closer to a vaccine. If the spike in new cases causes renewed shutdowns, we could be looking at big government budget problems and consumers in pain because the extra $600 per week will end in July.
As you can see from the chart below, the 7 day rolling average of new cases has spiked in the past couple weeks in Georgia. This is an important state because it was the first to reopen. On the positive side, the curve has flattened which means hospitals aren’t overwhelmed anymore. They aren’t even overwhelmed in NYC which was the worst hit area.
A problem is that social distancing will delay a spike in economic activity if COVID-19 is still thought of as a threat. We are seeing people moving more freely throughout the country. If the entire country’s cases spike in the next 2 weeks, we will see exceptional volatility in stocks. We don’t expect a new low, but we can expect a sharp decline because the market is so overbought. That's a logical conclusion merely from reading data and looking at market sentiment.
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Conclusion
Consumer spending growth has improved, but it will face a big drop off if the labor market doesn’t rebound by the time the extra $600 per week in unemployment benefits ends in July. It's amazing that markets were panicking a few weeks ago about COVID-19. And now it doesn’t even matter that Georgia is seeing an increase in cases due to its reopening.
Sentiment is very fickle. Just stick with the facts and you won’t be run over by extreme movements in stocks. If you don’t get hyper long stocks as they explode because of euphoria, you won’t be hurt that badly when the inevitable correction happens because of bad COVID-19 news or negative news on China relations.
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