Recovery continues as pace of infections slows - Capital Economics
US Economics

Recovery continues as pace of infections slows

US Economics Weekly
Written by Paul Ashworth
Cancel X

The incoming data this week were almost universally
stronger than expected, with even July’s non-farm
payroll figures coming in above consensus. With the
number of new daily coronavirus infections
beginning to abate, we expect further improvement in
the activity data over the coming months and
employment growth should pick up again too. The
upshot is that the balance of risks to our forecast that
third-quarter GDP will rebound by 25.0% annualised
now lies to the upside.

The incoming data this week were almost universally stronger than expected, with even July’s non-farm payroll figures coming in above consensus. With the number of new daily coronavirus infections beginning to abate, we expect further improvement in the activity data over the coming months and employment growth should pick up again too. The upshot is that the balance of risks to our forecast that third-quarter GDP will rebound by 25.0% annualised now lies to the upside.

The 5.2% m/m rise in real consumption in June – reported at the end of last week – was a little stronger than we had originally expected, but it still left spending 6.6% below its pre-pandemic February level. The wave of coronavirus cases in the South and the West, which peaked in mid-July, means that further progress was probably very modest in July. The footfall traffic data show activity levelling out in most categories. (See Chart 1.)

Chart 1: Consumer Foot Traffic (20th Jan = 100)

Source: NinthDecimal

But our forecast that consumption will rebound by around 30% annualised over the third quarter already included a trivial 0.5% m/m gain in July specifically. With the manufacturers’ data showing that light motor vehicle sales increased by close to 10% m/m in July, consumption may come in stronger than we expected despite the surge in coronavirus cases. And perhaps more importantly, the most recent drop off in the number of new cases suggests that consumption growth could reaccelerate over the rest of the current quarter. Our forecasts currently assume that real consumption continues to grow at a muted 0.5% m/m pace in August and September too, which is beginning to look overly pessimistic.

Nevertheless, we are cautious about upgrading the consumption forecast and, by extension, the GDP forecast too, when Congress is still struggling to reach agreement on any further fiscal stimulus. The $600 enhanced unemployment benefits lapsed at the end of last week and the Republicans and Democrats remain at loggerheads over how to extend them and/or roll out other fiscal support.

The latest round of survey-based activity data was also encouraging. Production was initially slower to rebound than expenditure as the lockdowns were eased, with manufacturing output in June still as much has 11% below its pre-pandemic level from February. That resulted in a big fall in inventories in the second quarter. But the jump in the ISM manufacturing index to a 16-month high of 54.2 in June suggests that production is now playing catch up, which means inventories should be a positive for third-quarter GDP growth.

June’s international trade data revealed a much bigger rebound in exports than imports. As it stands now, net trade is set to make a positive contribution to third-quarter GDP growth too. That is partly because exports fell more sharply during the lockdowns, but the mounting decline in the trade-weighted dollar, which has now fallen by 8% since the start of June, should also provide a boost.

Finally, although the gain in payrolls slowed to 1.7 million in July, down from 4.8 million the month before, that was still slightly better than we had expected given that the survey week coincided with the recent peak in coronavirus infections.

The week ahead

Continuing the run of better-than-expected data releases, next week we expect to learn that retail sales increased by 4.0% m/m in July, with industrial production probably up by 4.2% m/m.

Data Previews

Consumer Prices (Jul.) 08.30 Wed. 12th Aug.

Forecasts

Previous

Median

Capital Economics

Consumer Prices

+0.6%(+0.6%)

+0.3%(+0.7%)

+0.3%(+0.7%)

Core Consumer Prices

+0.2%(+1.2%)

+0.2%(+1.1%)

+0.2%(+1.1%)

Core inflation rebounding

We expect another solid rise in core consumer prices in July, reflecting the lagged impact of the strong initial rebound in demand.

Gasoline prices have been stable in recent weeks but are nevertheless 5.8% higher than the average level in June. Partly offsetting that, capacity constraints in the food industry are easing, with food producer price inflation dropping back sharply in June. We expect that to be reflected in lower retail food prices in July.

Excluding food and energy, we think core consumer prices rose by another 0.2% m/m last month. With consumption rebounding faster than production over recent months, inventory is becoming stretched, particularly in the auto sector. (See Chart 2.) Wholesale used vehicle prices also surged by close to 10% in July, which should be partly reflected in retail prices. Other goods which have seen a V-shaped recovery in demand, including clothing, should see more upward pressure on prices. But that will be moderated by continued subdued gains in rents and prices of other services still seeing subdued demand, so a sustained rise in inflation still seems a way off.

Chart 2: Auto Inventory & CPI New Vehicles

Sources: Refinitiv, Census Bureau

Retail Sales (Jul.) 08.30 Fri. 14th Aug.

Forecasts

Previous

Median

Capital Economics

Retail Sales

+7.5%

+1.7%

+4.0%

Core Retail Sales (Less Autos)

+7.3%

+1.3%

+2.1%

Recovery slowing, but not stalling

We expect a marked slowdown in the pace of recovery in retail sales in July, but that is not a huge disappointment given that sales are already back close to pre-pandemic levels.

Traditional proxies for retail sales have been surprisingly strong, with the rise in manufacturers’ sales pointing to an 11% rise in retail spending on autos last month. (See Chart 3.) Meanwhile, gasoline station sales look to have risen by 7.5% in June, partly reflecting a rebound in prices. Elsewhere, consumer footfall data suggest the recovery in other areas of retail spending has flattened out, but not gone into reverse. Likewise, the OpenTable data suggest in person restaurant diner numbers were down by 61.7% y/y in July, up slightly from 67.9% y/y in June. We think headline retail sales increased by 4.0% in July, with control group sales rising by a more modest 1.5% m/m. That would push retail sales above pre-pandemic levels but, with non-retail spending on services depressed, consumption remains much lower.

Chart 3: Auto Sales (% m/m)

Source: Refinitiv

Industrial Production (Jul.) 09.15 Fri. 14th Aug.

Forecasts

Previous

Median

Capital Economics

Industrial Production

+5.4%

+2.7%

+4.2%

Manufacturing Output

+7.2%

+3.0%

+5.0%

Manufacturing rebound driven by motor vehicle sector

We estimate that manufacturing output rebounded by an additional 5.0% m/m in July, although that would still leave output 6.7% below its pre-pandemic February level.

Manufacturing employment increased by a modest 0.2% m/m, or 26,000, in July, as a 39,000 increase in the motor vehicle production sector was partially offset by weakness in fabricated metals and machinery. But hours worked increased by a stronger 2.4% m/m last month, which suggests that manufacturing output rebounded by 5.0% m/m. (See Chart 4.)

Otherwise, utilities output appears to have risen by about 5% m/m again last month on the back of unseasonably warm temperatures. That may be partly be offset by another decline in mining output, but the pace of contraction does at least appear to be easing, with crude oil production stabilising in recent weeks.

Chart 4: Manu. Output & Employee Hours (%m/m)

Source: Refinitiv

Uni. of Michigan Consumer Confidence (Aug.) 10.00 Fri. 14th Aug.

Forecasts

Previous

Median

Capital Economics

Headline index

72.5

71.0

72.0

Expiring PUC payments to hold down confidence

We estimate that the University of Michigan consumer confidence index edged lower in early August.

After initially rebounding sharply in June, as the easing of lockdown measures and strong rebound in employment lifted sentiment, the Michigan index dropped back again in July, close to its March low. (See Chart 5.) That double dip appeared to be driven mainly by the renewed wave of coronavirus infections. But, with containment measures put in place in several states starting to prove successful in bringing that outbreak under control, confidence should strengthen again in August.

That said, the expiry of the $600 weekly Pandemic Unemployment Compensation payments at the end of last month could also weigh on confidence. With the fiscal talks in Congress continuing to drag on, those payments – which had been going out to nearly 30m Americans each week – have now lapsed. All told, we expect the University of Michigan index to have edged slightly lower to 72.0 in August, from 72.5.

Chart 5: UoM Consumer Confidence Index

Source: Refinitiv

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EST (BST-5)

Previous*

Median*

CE Forecasts*

Mon 10th

JOLTS Job Openings Rate (Jun)

10.00

3.9%

Tue 11th

NFIB Small Business Optimism Index (Jul)

06.00

100.6

98.5

99.0

Producer Prices (Jul)

08.30

-0.2%(-0.8%)

+0.3%(-0.7%)

+0.3%(-0.7%)

Core Producer Prices (Jul)

08.30

-0.3%(+0.1%)

+0.1%(+0.1%)

+0.1%(+0.1%)

Wed 12th

Consumer Prices (Jul)

08.30

+0.6%(+0.6%)

+0.3%(+0.7%)

+0.3%(+0.7%)

Core Consumer Prices (Jul)

08.30

+0.2%(+1.2%)

+0.2%(+1.1%)

+0.2%(+1.1%)

Monthly Budget Statement (Jul)

14.00

-$120.0bn

Thu 13th

Import Prices (Jul)

08.30

+1.4%(-3.8%)

+0.5%

Initial Jobless Claims (w/e 8th Aug)

08.30

1,186,000

1,000,000

Fri 14th

Retail Sales (Jul)

08.30

+7.5%

+1.7%

+4.0%

Core Retail Sales (Jul)

08.30

+7.3%

+1.3%

+2.1%

Control Group Retail Sales (Jul)

08.30

+5.6%

+0.8%

+1.5%

Nonfarm Productivity (Q2, Prov.) %q/q ann.

08.30

-0.9%

+1.6%

0.0%

Unit Labour Costs (Q2, Prov.) %q/q ann.

08.30

+5.1%

+6.0%

+20.0%

Industrial Production (Jul)

09.15

+5.4%

+2.7%

+4.2%

Capacity Utilisation (Jul)

09.15

68.6%

70.3%

Manufacturing Output (Jul)

09.15

+7.2%

+3.0%

+5.0%

Business Inventories (Jun)

10.00

-2.3%

-1.2%

-1.2%

Uni. of Mich. Consumer Confidence (Aug, Prov.)

10.00

72.5

71.0

72.0

Selected future data releases and events

18th August

Housing Starts (Jul)

08.30

19th August

Fed FOMC Minutes (29th July Meeting)

14.00

21st August

Markit Manufacturing PMI (Aug, Prov.)

09.45

Markit Services PMI (Aug, Prov.)

09.45

16th September

Fed Policy Announcement

14.00

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q ann. (%y/y) unless stated

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

2020

2021

2022

GDP

-32.9

+25.0

+8.3

+5.0

+4.7

+4.1

(-4.6)

(+4.5)

(+4.0)

CPI Inflation

(+0.4)

(+0.9)

(+0.8)

(+1.0)

(+2.5)

(+2.0)

(+1.1)

(+1.8)

(+1.9)

Core CPI Inflation

(+1.3)

(+1.0)

(+0.9)

(+0.8)

(+1.7)

(+1.7)

(+1.4)

(+1.5)

(+1.8)

Unemp. Rate (%), Period Ave.

13.0

10.1

8.0

6.3

5.9

5.5

8.7

5.8

5.1

Fed Funds Rate, End Period (%)

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

10y Treas. Yld., End Period (%)

0.66

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

S&P 500, End Period

3100

3300

3300

3300

3350

3400

3300

3500

3800

$/€, End Period

1.12

1.20

1.20

1.20

1.20

1.20

1.20

1.20

1.20

¥/$, End Period

108

105

105

105

105

105

105

105

105

Sources: Refinitiv, Capital Economics


Paul Ashworth, Chief US Economist, paul.ashworth@capitaleconomics.com