U.S. economy likely
passed its low point 

Inflation data from both consumers and businesses is providing more evidence that the U.S. economy has likely moved beyond the worst of the downturn. But if COVID-19 cases continue to swing upward, recovery could be muted.

June 16, 2020
Inflation provides more evidence the economy likely moved past the worst of the downturn

Inflation data for consumers and businesses for May indicated that aggregate demand likely already bottomed. The headline and core consumer price indexes (CPI) both declined slightly. Although May marks for the first time that the core CPI declined for three consecutive months, it also demonstrated that prices could be stabilizing. Both the headline and core producer price indexes (PPI) increased in May after their largest monthly declines in history during April. Meaningful inflation seems unlikely in the short term, but the economy likely passed the worst of deflation and weak demand.

Data from the labor market also continued to show signs that economy likely passed its nadir

Initial unemployment claims declined for the 10th consecutive week while continued claims (those who remained on unemployment insurance) declined slightly. While the data does not capture those that are only utilizing other government programs such as pandemic unemployment assistance (PUA), the overall picture remains one of slow improvement. Nonetheless, the elevated level of both initial and continued claims remains concerning, indicating that the economy still has a long recovery ahead. 

Consumer spirits also turning around

Consumer spirits, as measured by consumer sentiment, rebounded in June. Though the improvement exceeded expectations, the index remains down significantly from pre-pandemic levels. Phased openings in the economy, coupled with government support programs are likely propping up consumers’ feelings. Sentiment, already fragile, could falter over the next few months if the pandemic reignites in certain parts of the country, business shutdowns and lockdown are reinitiated, or government support programs do not get extended. 

Fed leaves policy intact

The Federal Reserve did not alter its policy stance during its most recent meeting. The Fed maintained its dovish stance, with the forecast showing no rate hikes until late 2022. The Fed seemed genuinely concerned about the economic outlook and the potential for downside risks as the economy attempts to restart. All other programs remained in place. 

Equity markets retrench amidst signs of escalation in cases

The equity market retrenched after the number of COVID-19 infections and hospitalizations started increasing again, especially in certain states that either did not completely shut down or initiated an early reopening. As we have said repeatedly and one of the key, defining features of the economic landscape: to a large extent the pandemic will dictate the economic cycle. If cases continue to swing upward that could imperil the nascent recovery, even if states do not initiate a second round of lockdowns and shutdowns.