- There is evidence from real-time economic data that the pace of economic recovery in the U.S. is stalling out.
- Weekly measures from the labor market suggest a pause at best in July.
- The reemergence of COVID-19 cases, roll-backs of openings, precautionary behavior, restricted capacity and fading of government support pose a rising downside risk to Americans' ability and willingness to spend.
News that the U.S. economy plunged by an annualized 32.9% in the second quarter was painful, but not a surprise (S&P Global Economics forecast 33.6%). That huge nosedive brought the annualized inflation-adjusted dollar amount of GDP down to levels not seen in nearly six years, leaving the U.S. at the bottom of a big economic hole. And while the traditional economic data (which are published with varying degrees of time lag) through late-June showed economic activity picking up at an above-consensus pace following a sharp decline in March and April was good news, it is backward looking. The more-recent rise in COVID-19 cases across large swaths of the country in July has begun to test the sustainability of June's recovery momentum.
S&P Global Economics now thinks the probability of an even worse economic outcome is 30%-35%, up from 25%-30%. Although our base case is for a gradual recovery through next year, the surge in COVID-19 and hospitalizations has raised concerns that the recovery will stall out.
COVID-19 cases have already risen by 87% since mid-June (see chart 1). 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 already started instating and reinstating restrictions on indoor and group activities.
Fortunately, cases have plateaued at these record levels. But, if cases continue to rise, it is only a matter of time before more states shut down more parts of their economies in fear of overwhelming hospital capacity. The White House Task Force created to manage the pandemic recommended that 21 states (was 18 states two weeks ago in our previous publication) in the coronavirus "red zone," which includes the above mentioned states, should roll back reopening measures amid surging cases. If these 21 states complied with recommendations, about 51% of the U.S. economy would be affected by restrictions on indoor and group activities--leading to another round of business closures just after they had begun to reopen their doors.
Absent a wide-spread mandated stay-in-place orders (like in April), we still expect the economy to grow in the third quarter. However, we now see that the once-hopeful bounce-back in the third quarter (22.2% annualized growth in real GDP in our June forecast) is very much at risk of weakening. Negotiation on whether Capitol Hill will extend stimulus measures will also weigh on how the bounce plays out the rest of the year. (see "U.S. Economic Update: A Recovery At Risk As COVID-19 Surges," published July 22, 2020, on RatingsDirect).
Our real-time tracker continued to see mobility rates moderate further this week, as increasing new restrictions and, possibly fears of exposure have kept people closer to home (see chart 2).
Restaurant reservations have started to reverse course once again, and hotel occupancy rates have also started to show weakness after improvements through early July (see charts 3 and 4). Movie theaters have yet to make any strides with households apparently preferring the comfort of watching movies at home (see chart 5). Flying remains out of favor, still, and U.S. crude oil patches have yet to turn on the spigots (see charts 6-9). In addition, capacity utilization of raw steel production remains subpar (see chart 10).
Although the news sentiment index appears to be improving, consumer confidence reflects uncertainty of the COVID-19 crisis, with the University of Michigan nearly its May low while the Rasmussen indicator has ticked higher (see charts 11-12). Consumer spending also seems to have hit a pause after a long climb back in both low-income and high-income localities (see chart 13). The missing spending multiplier from high income areas will surely pose a headwind to further recovery.
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. Initial jobless claims for the week ended July 25 rose for the second consecutive week, with total initial jobless claims topping the 50 million market. Continuing jobless claims have climbed by 867,000 in the July 18 week The Census' weekly Household Pulse Survey is also signally that labor market conditions have deteriorated significantly since recently monthly job gains in May and June (see chart 14-17).
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 18-20). Small businesses that have already spent small business loans to survive so far are seeing risk to business continuity rise. According to a June 25 "Local Economic Impact Report"," by Yelp, since March 41% of businesses in their survey have permanently closed, increasing worries that temporarily unemployed workers may have lost their jobs permanently (see chart 21).
The silver lining has been housing. However, the spring in the housing market (see charts 22-23) as evidenced by mortgage application and lumber prices 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 gradual recovery through next year to get back to prepandemic economic pie, the surge in COVID-19 cases and hospitalizations have raised concerns that it may take longer, or 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.
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 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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