EC Will “Go Crazy” Drive The Bear Out Of Hibernation?

Will “Go Crazy” Drive The Bear Out Of Hibernation?

The economy will “go crazy” this summer.” There is not a day that goes by in which we do not hear an economic forecast with an extreme optimism based on pent-up demand.

The argument certainly appears plausible and is widely subscribed to by professionals. To wit, JP Morgan: “We expect consumers to blowout expectations for the rest of the year.” Per Business Insider: “Goldman Sachs raised its forecast for 2021 US gross-domestic-product growth to 6.8% from 6.6%.”

To help put context around whether the economy will “go crazy,” we focus on consumer spending habits during the lockdown and the financial means which drove those habits.

If the “go crazy” scenario is correct, monetary velocity will rise and ignite a powder keg of the money supply. Inflation could ramp up beyond levels that comfort the Fed and/or markets.

The optimistic forecast appears, at first blush, good for stocks. We make the case that his thesis may signal springtime for the hibernating bear.

Is There Pent Up Demand?

Before we discuss the elephant bear in the room, let’s consider the merits of the “go crazy” thesis. How might consumer habits change when consumers are free to go anywhere and do anything?

Retail Sales, despite a severe recession, are 6.00% higher than in January of 2020. Is spending “pent-up”? To answer the question, we decompose retail sales into its sector components.

As shown below, the variance in sales changes versus the prior year is significant. Not surprisingly, gas stations, restaurants and bars, and clothes and electronics appliance stores had a tough year.  However, the nine other economic sectors saw improvements in sales versus 2019. The highlighted box points to aggregate changes in Retail Sales.

crazy, Will “Go Crazy” Drive The Bear Out Of Hibernation?

We have little doubt the four sectors with declines will post more robust sales once consumers are comfortable returning to those establishments. There is no doubt; pent-up demand will boost those sectors.

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