- With reemergence of virus transmission rates nationally, uncertainty is elevated again; high frequency real-time indicators of activity suggest momentum may be losing steam, with mobility, in particular, beginning to weaken.
- If COVID-19 cases continue to rise at the current pace, it is only a matter of time before states shut down more parts of their economy.
- The bounce-back in the third quarter real GDP growth--of 22.2% (annualized)--in our June forecast is now at risk of weakening.
Traditional economic data (which gets published with varying degrees of time lag) shows economic activity picking up at above consensus pace in May and June following a sharp decline in the preceding two months. While good news, it is backward looking. The more recent rise in COVID-19 cases across large swaths of the country in July gives us reason to question the sustainability of current economic momentum.
COVID-19 cases have risen by 60% since mid-June (see chart 1), and if cases continue to rise at the current pace, it is only a matter of time before states shut down more parts of their economy in fear of overwhelming hospital capacity. States like California, Texas, and Florida--which are ranked in the top five states by GDP measure and together account for close to 28% of the economy (see chart 2)--have already started instating and reinstating restrictions on indoor and group activities. Mobility has started to weaken with increasing new restrictions (see chart 3), and the fear is that the once hopeful bounce-back in the third quarter (22.2% annualized growth in real GDP in S&P Global Economics June forecast) is now at risk of weakening.
Restaurant reservations have started to reverse course once again, and movie theaters have yet to make any strides (see charts 4-5). Flying remains out of favor, still, and U.S. crude oil patches have yet to turn on the spigots (see charts 6-7). In addition, capacity utilization of raw steel production remains subpar, and consumer confidence appears to show a tentative reversal that's not as strong (see charts 8-10), in sharp contrast with some other offsetting encouraging demand activity (see charts 11-13) that has also helped price reversals (see charts 14-16). People-facing service sectors' ability to grow has taken a hit directly once again, and that means the composite economic activity is likely to stall on its recovery path, unemployment insurance claims will continue to stay elevated in the near term, and the news cycle will take a turn to become more pessimistic (see charts 17-20).
The longer the duration of virus uncertainty and unemployment status, the higher the chances of more business failures in the future despite high new business applications and a steady increase in reopenings since April (see charts 21-22). Consumer spending will also likely hit a pause after a long climb back in both low-income and high-income localities (see chart 23-24). The missing spending multiplier from high income areas will surely pose a headwind to further recovery. Small businesses that have already spent small business loans to survive so far are seeing risk to business continuity rise. The spring in the housing market (see chart 25) is also at risk now, especially--beyond the pent up demand from the delayed spring buying season and that the virus is limiting activity more in a majority of growth areas in the South.
The path of the virus will dictate the terms. Unless the spread of the virus is controlled in the coming weeks, it will be more likely that downside risk to our baseline outlook from June will be realized. Although our base case is for a slow recovery through next year, the surge in COVID-19 cases and hospitalizations have raised concerns that a double-dip recession (our June pessimistic scenario) may be on the horizon (assuming that the National Bureau of Economic Research [NBER] calls the end of the COVID-19 recession in May, as noted in our June report.)
This report does not constitute a rating action.
|U.S. Chief Economist:||Beth Ann Bovino, New York (1) 212-438-1652;|
|U.S. Senior Economist:||Satyam Panday, New York + 1 (212) 438 6009;|
|Research Contributors:||Debabrata Das, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai|
|Arun Sudi, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
|Shruti Galwankar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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