The second quarter of 2020 will probably mark the bottom of US economic activity as governments imposed a forced shutdown across businesses in an effort to slow the spread of the novel coronavirus. Even the most pessimistic forecasters acknowledge that some economic recovery is inevitable given the depth of the shutdown, but the key question now is what shape will the economic recovery take? The latest concern is that the resurgence of the coronavirus in southern and western states will create the impetus for regional lockdowns, again hampering economic activity and creating a “W” shaped recovery, with a second dip corresponding to the additional pullbacks necessary within the Sun Belt. Despite the concern of a pullback, stock futures continue to trade positively.
Forecasts thrive on clarity. However, conflicting economic information muddies the waters and makes consensus difficult to achieve. Let us consider two positive elements – green shoots of recovery growing up from the damaged environment. Also let’s consider two ways the economic repercussions of the COVID crisis may continue to flare up and create more problems for the recovery.
Green shoot #1 – the stock market. It’s true that the stock market should ultimately follow economic projections, but there is a cyclical self-fulfilling prophecy created by an upwardly mobile stock market that itself might encourage economic growth. If stock market prices keep increasing, regular investors feel wealthier. Wealthier investors are less likely to hoard their cash and feel more freedom to spend, which directly boosts economic activity.
Green shoot #2 – the home buying market. Americans are tired of being stuck in small apartments and there is pent up demand that has only been deferred by the mandated shutdowns. Pending home sales have jumped a record 44.3% in May as homebuyers are swarming back in the market.
Flare up #1 – July 31st. What’s so scary about July? It’s the presumptive end of the CARES Act’s $600 federal unemployment benefit. Unemployment is high and millions of households are only maintaining their financial status quo (mortgage payments, utility bills) with assistance. The job market simply will not fully reabsorb the millions of furloughed or laid off workers once that unemployment subsidy expires, causing additional stress to the financial system.
Flare up #2 – Bankruptcy waves. Key industries are expected a wave of bankruptcies in the months to come. Energy firms (e.g. Chesapeake Energy) and retailers (JC Penney). We have written about the challenges these sectors have faced prior to the pandemic, but the news of 2020 has accelerated and amplified the stressors.