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Economic Research: U.S. Biweekly Economic Roundup: Recent Gains Are Likely To Slip On Rising COVID-19 Cases

Traditional economic data this week provided hope that the U.S. economic recovery is still on track after the coronavirus-led sudden-stop. However, the data is backward looking (representing June). With the recent rise in COVID-19 infection rates across large swaths of the country, we question the sustainability of the current economic momentum.

As COVID-19 cases climb at a dramatic rate nationally, uncertainty is elevated again. High frequency real-time data, which first hinted at start of normalization in May, now suggests that momentum may be losing steam (see "U.S. Real-Time Economic Data Suggests Hopeful Signs Of A U.S. Recovery Could Be Short-Lived," published July 16, 2020). Concerns are growing that this recovery bounce might be over as quickly as it started.

The re-closures of businesses and other institutions in a number of states will almost certainly change the U.S. economic outlook. How many states close and how long these closures last are key in determining the impact, with the path of the virus dictating the terms. Already 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--have started instituting and reinstating restrictions on indoor and group activities.

Our June forecast of a 22.2% bounce-back in third-quarter real GDP growth (annualized) is now at risk of weakening. While S&P Global Economics' current base case is for a slow recovery through next year, the surge in COVID-19 and hospitalizations has raised concerns that our downside scenario may be gaining steam.

Chart 1


Chart 2


June Starts Solidify Swift Recovery In Housing, But Momentum Is Likely To Slow Down

Recovery in the housing sector has been impressive. Mortgage applications--a leading real time indicator of housing demand--has been pointing to a sharp recovery in this sector since late April. Cheaper mortgage rates--like the 30-year fixed--are now at an average of 2.98%, the lowest since 1971 according to data from mortgage finance agency Freddie Mac. This has supported the housing market recovery, without a doubt. The housing sector's strong momentum leading up to the crisis and pent-up demand from the usually active spring season have also contributed to the quick and sharp recovery, despite elevated levels of unemployment.

The data released this week on housing starts (for June) and builders' confidence (for July) also back up the rebound theme and our expectation from our June forecast that housing will recover steadily the rest of the year. However, downside risk from the spread of the coronavirus is building again, and that tempers our expectation for the near term.

Housing starts (new ground breakings) increased sharply in June as widely expected--by 17.3% (month over month) to a 1.186 million annualized pace. Following the April trough (0.934 million) for starts after a three-month pullback from a 13-year high of 1.617 million in January, May and June combined have averaged 1.095 million starts. Housing permits--a leading indicator of upcoming starts--rose 2.1% to a 1.241 million pace in June (but it still remains about 4% below 12-month ago levels).

Chart 3


In tandem, builders' sentiment--according to the National Association of Home Builders' (NAHB) Housing Market Index of Single Family Homes (HMI)--has also moved up to levels considered very strong. In July, the HMI was 72, up 14 points over the month and now sharply higher from 30 in April. Of the HMI's three components, current sales conditions jumped 16 points to 69, sales expectations in the next six months rose seven points to 75, and buyer traffic rose 15 points to 58. Builders reported increased demand for single-family homes in lower density markets, including small metro areas, rural markets, and large metro suburbs--perhaps reflecting some anecdotal evidence of folks shifting office work permanently away from urban office areas due to the public health crisis. Reflecting such sentiment, perhaps in part, single-family housing starts jumped 17.2% to 0.831 in June following a 4.4% gain in May.

We also like to look at starts under construction, which fell 0.6% in June. Starts under construction had only a modest pullback through April and stayed weak in growth terms ever since. Since starts under construction is what actually drives residential construction in GDP accounting, we temper our enthusiasm about the contribution of residential investment to GDP growth from the headline starts figure.

Besides, the South and the West are key growth regions for overall housing activity (accounting for three-fourths of all starts), and the recent considerable increase of virus cases in these regions and subsequent reimposed restrictions pose downside risk in the near term. Once the economy works through pent-up demand from a delayed seasonally busy spring season, the health of the labor market is going to govern the momentum despite favorable demographics and interest rate environment.

Retail Sales Are Back To Pre-pandemic Levels, But Momentum Is Poised To Stall

Retail sales (in nominal terms) increased by a more-than-expected 7.5% (month over month) in June following a historic 18.2% bounce in May, to reach just about February's pre-pandemic level--a remarkably sharp recovery. On a year-over-year basis, retail sales stand 1.1% above 12 months ago.

Chart 4


Without a doubt, the government income transfer has helped this recovery in consumer spending. Such an initial burst was to be expected from low levels given the opening of malls and restaurants, but May and June combined have surpassed our expectation. Core retail sales--excluding sales of autos, gas, building materials, and food services, and which feeds into GDP accounting--rose 5.6% on the month, also above consensus, our expectation and February level. The bigger gain in June means that real consumer spending contraction in the second quarter might be slightly smaller than we had forecasted.

But looking forward into the third quarter, the new wave of infections leading to renewed closures and restrictions in an increasing swaths of states mean the balance of risk to our third-quarter forecast is on the downside. Simply put, sales may be up in June, but stores and restaurants that are closed (again) and customers who may take more precautionary distancing measures (if they haven't already) will keep growth in sales limited in July and August.

The renewed decline in the University of Michigan's Consumer Sentiment Index to 73.2 in July, from 78.1, is an indication that the surge in new infections is already weighing on sentiment. A more up-to-date credit card based data compiled by Track The Recovery project shows consumer spending rebounded steadily from April (-33% relative to January 2020) until the third week of June (-5.8% relative to January 2020) but has stalled ever since (-6.8% in as of July 8). Taken together, we are likely in for a rough ride for consumer spending growth in the near term until the virus spread is contained.

Table 1

Review Of Economic Indicators Released In The Past Two Weeks (July 6, 2020 - July 17, 2020)
Latest period Jul-20 Jun-20 May-20 Level year ago % year-over-year
Business activity and sentiment
Industrial production (% change) June 5.40 1.4 (10.8)
Capacity utilization (level, rate) June 68.6 65.1 77.7
Retail sales (% change) June 7.5 18.2 1.1
Wholesale trade, inventories (% change) May (1.2) (4.2)
Business sentiments
New York Empire State Manufacturing Index July 17.2 (0.2) (48.5) 4.2
Philadelphia Fed Manufacturing Index July 24.1 27.5 (43.1) 16.6
Housing and construction
Housing permits (SAAR, mil. units) June 1.241 1.216 1.273
Housing starts (SAAR, mil. units) June 1.186 1.001 1.235
Housing completion (SAAR, mil. units) June 1.225 1.174 1.23
External sector
Import prices (% change) June 1.4 0.8 (3.8)
Export prices (% change) June 1.4 0.4 (4.4)
PPI (% change) June (0.2) 0.4 (0.8)
CPI (% change) June 0.6 (0.1) 0.7
Core CPI (% change) June 0.2 (0.1) 1.2
Note: Core CPI excludes food and energy. Sources: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, and U.S. Census Bureau.

Table 2

Economic Release Calendar
Date Release For Forecast Consensus Previous
22-Jul Existing home sales (mil.) Jun 3.900 4.815 3.910
23-Jul Leading indicators (%) Jun 2.00 2.10 2.80
24-Jul New home sales (mil.) Jun 0.710 0.7 0.676
27-Jul Durable goods orders (%) Jun 7.00 6.50 15.70
28-Jul Consumer confidence Jul 95.0 96.5 98.1
29-Jul Advance trade in goods ($) Jun (75.26) (74.30) (74.30)
30-Jul GDP Advance Report (%) Q2 (33.60) (34.50) (5.00)
30-Jul Chain Price Index Advance Report (%) Q2 (0.80) (1.00) 1.40
31-Jul Employment Cost Index (%) Q2 0.60 0.60 0.80
31-Jul Personal income (%) Jun (0.90) (0.40) (4.20)
31-Jul Personal Consumption Expenditure Jun 6.50 6.00 8.20
31-Jul Chicago PMI Jul 48.0 43.3 36.6
31-Jul University of Michigan Consumer Sentiment (final) Jul 72.0 73.6 78.1

The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.

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 Contributor:Debabrata Das, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai

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