28 October 2020
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David Park
CEO of Austin Capital Trust
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Economic and Market Recovery Facing Headwinds
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When the stock market rallied back in the beginning of March, it seemed the market was anticipating a V shaped recovery. Six months later, some of the optimism seems justified.  The economic recovery has shown surprising resilience in the face of increasing levels of coronavirus infections and expiring fiscal stimulus. The economy bottomed in April, and it has grown ever since.  One reason for this comeback is the $2 trillion monetary and fiscal stimulus.   

After the Federal Reserve slashed interest rates to near zero in March and purchased assets at an unprecedented level, mortgage rates plunged.  As a result, new home sales hit a 13-year high in July, and home construction is back to pre-COVID-19 levels.  Congress supplied households and unemployed Americans with enough aid to more than offset lost wages, increasing retail sales. 

Bank of America estimates that credit card spending by the unemployed fell between 7 and 18 percentage points, while spending by everyone else rose 2 to 4 points by the end of August.  Overall, during the same period, they estimate credit card spending was 2% above January levels. 

In July, IHS Markit, an economic analysis firm, projected GDP would expand 17.7% annualized in the third quarter.  But most indicators since have been better than projected, and IHS now sees GDP growing 29.6% in the third quarter, which ends Sept. 30.  Last month, unemployment dropped to 8.4%, beating estimates, and August was the fourth straight month the job market outperformed economists’ expectations. 

That’s the positive, but the negative may be that recovering the remaining ground may be tougher, which may be why the stock market has wobbled recently.  When you analyze the positive number, they may not be quite as good as they seem: the quarterly growth projection is expressed as an annual rate which tends to overstate the bounce back.  The forecast means two-thirds to three-quarters of the second quarter drop will be reversed in the third quarter. 

Despite the rapid pace of recovery, a 30% rebound in the third quarter will still leave GDP down 4% from the end of 2019, which is equivalent to the economic decline inflicted by the global financial crisis in 2009. And the pace of recovery is likely about to slow.  One reason is the inability to pass a second fiscal stimulus and a second is that the expected bounce from reopening are behind us.  Restrictions on restaurants, entertainment, and personal services, which together contribute 5%of GDP, are slowly lifting but the longer the pandemic drags on, the more likely these businesses in these sectors will close forever.   Since February, over two million people have permanently lost their jobs, and these numbers may continue to grow. 

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