- As more states reopen, the number of COVID-19 cases per million population has started to rise again in the U.S., and real-time data is indicating a slowdown in the economy's recovery.
- Upside for the goods sectors that were quick out of the gates has diminished, and service sectors that are still below pre-pandemic levels may be finding a new temporary normal amid health concerns and restrictions.
- Pressure on people-facing businesses and industries remains unprecedented--a result of government restrictions on capacity, expiring government stimulus hurting pocketbooks, and a curbing of customers' demand based on fears of venturing out.
- Risks of policy intervention are still tilted to the downside at this time, while initial unemployment claims remain 4x the pre-pandemic level and job openings in cities are well below normal.
Since our last real-time data report about two months ago (see "U.S. Real-Time Economic Data Continues To Paint A Mixed Picture," Aug. 14), the number of COVID-19 cases per million population has started to rise again in the U.S. (see chart 1). This was somewhat expected as state reopenings broadened after a midsummer pause, and reversal in some cases (see chart 2). The timing of schools reopening nationwide is a compelling correlation. Moreover, as the U.S. experiences cooler weather and people head indoors, there is an increased risk of more cases this fall.
In comparison with the midsummer rise, this time around, other major economies in Europe have also seen a steady increase. In the U.S., the rate of positive tests has hovered near or slightly below 5% since the end of August, suggesting there is room for improvement for testing in the U.S. (The World Health Organization has suggested a positive rate lower than 10%--but better lower than 3% for advanced nations--as a general benchmark of adequate testing. In some countries like Australia and South Korea, where they have had adequate testing, their positive rates are below 1%.) Mobility measures have also slightly drifted lower compared with the pre-COVID-19 levels (see chart 3).
After A Snapback In May-July, Real-Time Economic Measures Have Been Showing Signs Of Easing
Our preferred weekly economic activity index (from the New York Fed)--which has a good record mapping to real GDP--indicates that about three-fifths of the output lost from mid-February to the end of April had been recovered as of the first week of October (see chart 4). The Johnson Redbook Index of weekly same-store sales climbed back to positive territory year over year, though it remains volatile and below last year's normal level (see chart 5). Upside for the goods sectors that were quick out of the gates has diminished, and service sectors are still below normal and face health concerns and restrictions.
While service-sector spending will be the source for spending growth in the future, it's not now. In our view, services consumption, such as entertainment, travel, restaurants, and gyms, will continue to be impaired for awhile, setting a temporary lower new normal before a vaccine is widely available. This is also, in part, reflected in high-income earners' spending trend, which remains below normal (see chart 6). The missing spending multiplier from high-income earners in particular will pose a headwind to further recovery.
S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
Uncertainty About COVID-19 And Potential Fiscal Stimulus Weighs On Consumer Sentiment
Meanwhile, consumer spending growth of low-income earners is at risk. Congress may eventually pass additional fiscal stimulus, but for now, news out of Washington has been unfavorable regarding chances of another meaningful fiscal stimulus passing before the election. Recovery in measures of consumer sentiment continues to show restrained optimism (see chart 7).
Pressure on people-facing businesses and industries remains unprecedented--a result of government restrictions on capacity, expiring government stimulus hurting pocketbooks, and a curbing of customers' demand based on fears of venturing out. Restaurant reservations continue to weaken, and movie theaters have yet to make any strides, with households apparently preferring the comfort of takeout and watching movies at home (see chart 8). With cooler weather arriving, the restaurant sector will be challenged, especially in northern states. In the latest October data, restaurant reservations--the seven-day moving average--were still 61% below year-ago levels in New York and down 33% in Florida. In early September, there was a surge in restaurant dining around Labor Day--a temporary calendar effect.
While hotel indicators have improved since the severe plunge in April, occupancy rates remain depressed (see chart 9). The hotel occupancy rate for the week ended Sept. 26 was down by 31.5% year over year. Flying remains out of favor still, with air traffic on Oct. 4 down 65% year over year (see chart 10).
Oil Prices Recover But Remain Below Breakeven, And Rig Counts Are Still Low
While the West Texas oil price is recovering from crisis lows, it remains below break-even prices, with rig counts down further. However, U.S. refiner activity is nearing precrisis levels in anticipation of greater demand for fuel, perhaps as people stick to a safer form of transportation--their own cars (see chart 11). Capacity utilization of raw steel production remains subpar but has shown steady improvement since May (see chart 12).
Trade And Production Pick Up While Industrial Metal Prices And Rail Traffic Stabilize
As industries are warming to producing and shipping again around the world, trade and production have picked up meaningfully. The Baltic Dry Index (BDI)--which measures changes in the cost of transporting various raw materials--has risen above its 2019 average level since June on a pickup in demand across vessels (see chart 13). Industrial metal prices have stabilized around their 2019 average, much higher than in April at the height of the U.S. quarantine though well below precrisis levels (see chart 14). Weekly rail traffic has also stabilized (see chart 15).
The Housing Recovery Benefits From Pent-Up Demand
The silver lining throughout this recovery has been in the housing sector, which has clearly had a V-shaped recovery--mortgage applications and lumber prices are a clear reflection of that (see charts 16 and 17). This may be, in part, at the expense of commercial real estate activity, with nonresidential spending down in five of the last six months through August. That said, the spring in the housing market may face challenges. Although pent-up demand from the delayed spring buying season provides support, there is plenty of scope for a slowdown to a more sustainable pace in the coming months as virus-led roadblocks to labor market recovery persist.
Unemployment Benefit Claims Have Declined But Remain Elevated
Initial jobless claims for regular state benefits in the week ended Oct. 3 were 840,000--about 4x the pre-pandemic level. Combined with those who are now in the extended benefits program (13 more weeks once the initial regular state benefits of 26 weeks expire) and the gig/contract workers under the Pandemic Unemployment Assistance (PUA) program, the total number of individuals receiving unemployment benefits fell 1.1 million to 25 million in the week ended Sept. 19. If we exclude California, whose claims data has been questioned for its validity, 18.2 million were receiving those benefits, also down 1.1 million from the prior week.
Of those on regular state continuing claims, the "insured unemployment rate" from the weekly claims report is below average for the red states (Republican-won states in the last presidential election) and above average for blue states (Democratic). Note that this is a different unemployment rate from the regularly quoted monthly unemployment rate but is still an important observation that may be partly related to differences in views on the tradeoff between reopening and health. Red states may be more willing to reopen fully, leading to a lower unemployment rate than the national average. This may be one reason that the two sides in Congress can't see eye to eye on the next round of stimulus.
Job openings, as indicated by Indeed's job posting measure, are still well below normal nationally (see chart 21). A similar jobs demand measure by the Conference Board, which is called The Conference Board-Burning Glass Help Wanted OnLine, points to a city versus suburbs story playing out. According to the Conference Board, hiring activity has now come back above pre-pandemic levels in the suburbs while the city-centers continue to experience recession-level hiring activity.
As Fed Chairman Jerome Powell said in his recent speech to the National Association of Business Economics, "At this early stage, I would argue that the risks of policy intervention are still asymmetric. Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. Over time, household in-solvencies and business bankruptcies would rise, harming the productive capacity of the economy and holding back wage growth. By contrast, the risks of overdoing it seem, for now, to be smaller." We agree that additional fiscal policy support is going to be vital to ensure the recovery doesn't stall at a lower growth equilibrium.
All things considered, the real-time economic indicators point to an economy that is on the mend but at a decelerating pace. Elevated uncertainty about the virus and the scope and timing of fiscal stimulus has the balance of risks to the economic outlook in the fourth quarter and beyond tilted to the downside. The absence of a new stimulus package will begin to take a toll on the recovery in the fourth quarter. We continue to see the risk of another recession over the next 12 months (a W-shaped recession) at 30%-35%.
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.
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|
|Shruti Galwankar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
|Arun Sudi, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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