Has the recovery
downshifted already?

While there are a number of positive signs from both the supply and demand sides showing the economy’s got nowhere to go but up, there are also equally compelling signs that point to it slowing down once again

July 20, 2020

Conventional and nonconventional data show that the economy likely hit its nadir in April. Data released for May and June generally display signs of an economy that began expanding again after a very deep contraction. Evidence for this rebound exists on both the demand side and supply side of the economy. But caution still abounds. Despite some resurgence, the economy remains in a hole relative to peak levels from late 2019 and early 2020. And by some metrics the recovery is likely already slowing down.

On the demand side, retail sales for June offered the latest sign that the economy has passed its trough. Overall, advance sales grew by 7.5% on a month-to-month basis. That follows a strong 18.2% increase in May. The overall level of sales quickly rebounded back near early 2020 levels. Sales growth registered strong gains across a variety of store types including clothing stores, electronics stores, and sporting goods stores. Clearly, consumers released pent-up demand as economies reopened somewhat. Inflation data also indicate an economy heading back up. The headline consumer price index (CPI) for June increased by 0.6% after declining in May. Core CPI also increased slightly. Additionally, the import price index for June increased by 1.4%, its largest increase in roughly 8 years. That followed a rebound in the index in May. Although spiking energy prices drove the overall index upward, the rest of the index also increased.

Supporting evidence also lurks on the supply side of the economy. Industrial production grew by 5.4% in June. That reading followed a 1.4% increase in May. Output increased across a wide variety of key industries. And housing starts increased by 17.3% in June. Although building permits increased marginally, taken together they also show that activity is increasing. Overall, data from the production side of the economy show a modest rebound from a lull early in the second quarter.

Yet, as the number of COVID cases continues to increase, data are starting to show that the nascent, tenuous recovery is already potentially slowing down. Consumer sentiment for July declined, giving back almost all the gain in the index from June. Nontraditional, real-time metrics, such as retail foot traffic and restaurant reservations also show activity easing, particularly in the parts of the country where cases are increasing significantly. 

Increasing case levels present significant risks for the economy heading into the second half of the year. If the flaring pandemic causes further slowing in states reopening and reinstituting lockdowns, that would present a headwind to the recovery. Yet even in the absence of lockdowns, many consumers will avoid engaging in many activities out of fear of getting ill while some consumers who fall ill will not be healthy enough to fully participate in economy. Both will harm future growth prospects. Governments can shut down the economy by edict, but they cannot reopen it by edict.