July Economic Commentary: Tempered Improvement

John Beuerlein
John Beuerlein
Chief Economist
Pohlad Companies

The reopening of many state economies in late May/early June provided a boost to many short-term economic indicators. High-frequency measures of economic activity confirmed that consumers were starting to spend some of the savings accumulated over the previous three months. The “green shoots” of economic activity were growing. The recent acceleration of virus cases in the Sunbelt, however, has tempered activity and caused some states to roll back their reopening plans, consequently slowing the nascent spending boom. The importance at this juncture of keeping economic momentum improving can be seen in the commentary that follows.

Unemployment Rate = 11.1%, down 2.2% from May

Employment Picture
The June employment report released on July 2 indicated that the labor market saw further improvement during the first half of June. Sectors that were hardest hit by the virus closures (hospitality, leisure, and service jobs) are recovering faster than expected. The unemployment rate dropped to 11.1% from 13.3% in May. While the trend is encouraging, actual numbers clearly portray the challenge that remains. 22.2 million jobs were lost in March and April. Since then, 7.5 million have been added back, leaving a net deficit of 14.7 million jobs that have been lost. The employment/population ratio indicates that only 54.6% of the working age population (age 15 – 64) is employed. That is down from 61.1% in February. Prior to the current crisis, the lowest reading (since 1948) was 55.0%.

Initial jobless claims continue to come down only grudgingly and imply that the labor market recovery will take several years. It is estimated that approximately 75% of workers claiming unemployment are making more because of the coronavirus unemployment bonus of $600 per week than if they had remained employed. This has enabled consumers to pad their savings accounts. The personal savings rate, measured as the percent of disposable income that is saved, reached a record 32.2% in April and eased to 23.2% in May. Savings only help the overall economy, however, if they are spent. The recent resurgence of the virus, and the fact that the $600 per week coronavirus unemployment bonus is scheduled to end on July 31, is likely causing many unemployed consumers to continue to save rather than spend.

Real GDP
An estimate of 2Q-20 Real GDP can be calculated by looking at the aggregate hours of work during the quarter compared to the previous quarter. This calculation suggests that the initial reading for 2Q-20 Real GDP will be between -30% and -40% on an annualized basis (to be released on July 30). Since the GDP series started in 1947, the largest quarterly decline has been -10% annualized.

Inflation Watch
The June reading from the Institute for Supply Management (ISM) indicates that manufacturing activity in the economy has started to expand after three months of sharp contraction. This suggests that supply is coming back more quickly than demand, which, if continued, will help to keep inflationary pressures in check at both the manufacturing level and the consumer level. Contained inflationary pressures will cause long-term interest rates to remain historically low for the foreseeable future.

Looking Forward
Putting all of this data together, it is clear that further fiscal support for the consumer, and thus the economy, is likely in the coming weeks to ensure that the “green shoots” do not wither. Without further government assistance, consumer spending will likely drop sharply once the $600 per week unemployment benefit ends on July 31. A thoughtful program is needed that does not encourage people to stay unemployed but assists them until they go back to work.

The ultimate path of the economy remains highly dependent on the course of the virus. Until the virus is contained, economic activity will remain restrained and the path to full recovery will be uneven.