Economy Is Slowing

This economy is slowing because of the increase in COVID-19 cases. And the stock market is ignoring this unless you think the 7% correction priced this in. A problem with that logic is over half of that correction has been rescinded even though we have no evidence the slowdown is over. 

We just started getting evidence the slowdown has started. It amazes me how the stock market just ignores any bad news. That’s especially the case for the Nasdaq as the index keeps making record highs.

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The chart above is our best evidence yet that the slowdown is real. As you can see, the 7 day average of Chase card spending fell from -9.6% growth to -12.9% growth on a yearly basis. This supports the expectation for weakness because of the renewed shutdowns in a few southern and western states. If you add up Texas, California, Florida, Georgia, and Arizona, it equates to 34% of U.S. GDP. At least a third of the economy is in severe contraction. 

Obviously, that’s going to show up in the national data. Growth will likely be weaker in the next update. Obviously, we have the 4th of July celebration in that week. Given the closure of bars and restaurants, the holiday comparison might make growth look even worse. Just because stocks are ignoring this, doesn’t mean investors will. This is about to be the first major setback since the recovery started in early to mid-April.

COVID-19 Update: Bad News

This COVID-19 situation appears to be getting worse in the south and the west. The market is completely ignoring this. If anything, stocks are being helped by COVID-19 because it encourages more traders to speculate on cloud stocks. Software has eaten the entire stock market. What’s good for tech is good for the S&P 500 and the Nasdaq. Russell 2000 and the Dow have lagged.

On Wednesday, there were 51,097 new cases which is by far a record high. It was wrong to suggest there might be a peak coming soon in the worst-hit areas. Previous record high had been 47,365 on June 26th. On the bright side, the 7 day average of deaths fell from 581 to 560. If there is ever going to be a spike in deaths because of this onslaught in cases, it will occur within the next 2 weeks. So far, so good.

On the negative side, there has been an increase in hospitalizations. They bottomed at 27,115 in mid-June. Now hospitalizations have increased to 35,937. That’s the highest total since May 28th. 

Even if hospitalizations get above the previous peak, deaths shouldn’t be as high because treatment has improved. Obviously, we don’t want to test that theory because that would cause hospitals to be overrun with patients.

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A spike in new cases came from the usual suspects. There were 8,240 new cases in Texas which was a new high. As you can see from the chart above, the positive rate increased from 12.9% to 15.3%. If people try to gather together on the 4th of July in the south and west, there will be a massive spike in cases because the virus is so prevalent. 

Arizona is in the worst shape in the country as there were 4,877 new cases which was by far a new high. There were 88 new deaths which was also a new high. 7-day average is 36 which tied the record high.

As you can see, there needs to be more testing in Arizona as the positive rate is 26.2% which is enormously high. A new problematic state is Georgia which had 2,946 new cases which was by far a record high. From June 10th to July 1st, the positive rate increased from 6.2% to 13.5%. This was one of the first states to open. Its opening has been a failure. 

The worst case scenario for the country would be if cases spike well after these states close, forcing them to stay closed for a couple of months. To be clear, this is referring to the other states as Georgia hasn’t closed yet. It might not close for a while because its government was the most motivated to open back up.

Big Improvement In Manufacturing PMI

June ISM manufacturing PMI rose from 43.1 to 52.6 which destroyed estimates for 49. It beat the highest estimate which was 51.5. I have been predicting a big rebound in manufacturing because it is less reliant on human contact, is more likely to be deemed essential, and is used to rebounding after major crashes. 

PMI is now consistent with a growing manufacturing sector since it’s above 50. It’s the equivalent of 2.9% GDP growth. Obviously, Q2 is going to be a disaster for GDP growth. If anything, this signals Q3 could be a strong quarter for manufacturing.

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PMI improvement was primarily boosted by production and new orders which is ideal. They increased 24.6 and 24.1 points to 56.4 and 57.3 which means they went from signaling contraction to growth. Further good news is the employment index rose 10 points to 42.1. Weak reports were helped by supplier deliveries. This PMI improvement was held back by it which means the turnaround would have been larger without this misleading category. 

Deliveries fell from 68 to 56.9. Prices index rose 10.5 points to 51.3. Food, beverage, & tobacco products and chemical products expanded strongly. On the other hand, transportation equipment and fabricated metal products contracted, but at lesser levels.

Within the comments section, COVID-19 was specifically mentioned 3 times, but obviously it affected every business. A wood products firm stated, “The building industry continues to defy expectations, as we continue to rebound stronger from the previous month. Being an essential business across most states and a surge in DIY projects has fueled the industry forward. While the industry will follow the greater economy, we do believe it will be more resilient than most due to potential migration from larger cities and an undersupplied housing market.” It is doing well because of the home improvement and housing markets.