The narrative around COVID-19 is constantly changing, so we thought we would put a one-pager out once a week with some of the charts and data that we think are important to keep an eye on to help gain some perspective. 

Click here to view the one-page report.

Have a great weekend.

Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Dep. Chief Economist

Implications:  The Coronavirus continues to bring volatility to producer prices, as both goods and services industries adapt to supply chain disruptions and reopening efforts.  Expectations were for a 0.4% increase in producer prices, but instead a 1.8% decline in trade services (think margins to wholesalers and retailers) more than offset rising costs for goods.  In particular, margins for machinery and vehicle wholesaling, down 7.3% in June, represented 80% of the decline in the services sub-index.  On the goods side, the typically volatile food and energy categories lived up to their reputations, with food prices declining 5.2% (essentially reversing the jump back in May when meat processing plants shutdowns limited supply) while energy prices rose 7.7% on the back of higher gasoline costs.   Strip out these volatile categories, and "core" producer prices declined 0.3% in June.  Core producer prices are essentially flat over the past twelve months.  Expect disruptions related to COVID-19 to continue to muddy the data over the coming months, with excess volatility in no short supply.  Once the dust finally settles – and it eventually will – we expect inflation to trend back toward 2% and then higher.  The Federal Reserve is loose and, as it has made abundantly clear, plans to stay that way for the foreseeable future. Meanwhile, a combination of businesses operating at limited capacity and unusually generous unemployment benefits remain a headwind to economic activity.  The result will eventually be too much money chasing too few goods (and services), meaning higher – but not hyper – inflation.  Further down the pipeline, prices for intermediate demand processed goods rose 0.9% in June, while intermediate demand unprocessed goods jumped 3.1%.  In spite of the movement higher in June, both intermediate demand categories continue to show prices broadly lower compared to year-ago levels.  The data is starting to shift higher, tracking the emergence of the economy from what was a severe – but short – recession. We still have a long way to go to get back to where we were at the start of 2020, but the initial steps of recovery are under way, and we don't expect the pickup in cases across some states to stop growth from marching onward.  In recent news on the employment front, initial jobless claims declined for a fourteenth consecutive week, coming in at 1.314 million last week, down 99,000 from the week before. Continuing claims, which lag initial claims by a week, declined 698,000 to a reading of 18.062 million.  These figures suggest the rebound in the labor market continues in July, although it far from fully healed.

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Sources: First Trust Advisors, Department of Labor, Redbook Research, Box Office Mojo,  Association of American Railroads, American Iron and Steel Institute,  Hotel News Now, Opentable, Transportation Security Administration, Energy Information Administration

1 Data for level, year ago level, and month ago level are all YOY % changes.

2 Data is provided daily instead of weekly.

3 Data shows year-over-year seated diners at restaurants on the OpenTable network across all channels: online reservations, phone reservations, and walk-ins. % change month over month is the current reading minus the month ago reading.

Sources: First Trust Advisors, Department of Labor, Redbook Research, Box Office Mojo,  Association of American Railroads, American Iron and Steel Institute,  Hotel News Now, Opentable, Transportation Security Administration, Energy Information Administration

1 Data for level, year ago level, and month ago level are all YOY % changes.

2 Data is provided daily instead of weekly.

3 Data shows year-over-year seated diners at restaurants on the OpenTable network across all channels: online reservations, phone reservations, and walk-ins. % change month over month is the current reading minus the month ago reading.

Implications:  A strong surprise to the upside from the service sector, as the ISM Non-Manufacturing Index recorded its largest single-month increase (by far) in the series history dating back to 1997.  The 11.7 point jump in the overall index brought the service sector reading comfortably back into growth territory at 57.1 (remember, readings above 50 signal expansion).  In total, fourteen of eighteen companies reported growth in June, while three reported contraction (one reported no change). And the underlying indices showed improvement across the board. The one index that declined – supplier deliveries – increases when companies report longer delivery delays (typically a sign of more demand than companies can fill in a timely manner), so the continued decline in June means fewer delays. In the current situation, delivery slowdowns had been due to supply chain constraints and lowered production levels, so fewer delays are a good sign. The key comment from respondents on the supply chain situation showed that "delivery delays appear to have largely shaken out, and most products are becoming readily available with normal lead/shipping times."  In other words, deliveries are getting back to "normal." The two most forward-looking indices – business activity and new orders – both saw massive improvements in June. Activity rose 25.0 points, the largest monthly increase in the index's history, beating last month's 15.0 point gain that previously held the distinction of largest monthly improvement. The new orders index followed suit, up 19.7 points (also a record for the series), to a healthy reading of 61.6. For both orders and activity, 15 of 18 industries reported growth, with just one - "other services" - reporting contraction (two industries reported no change). The only main sub-index to remain in contraction territory was employment, which rose 11.3 points to a reading of 43.1 in June.  That said, we received the employment report last Thursday, which showed 4.8 million jobs added in June.  For more details on the June employment progress, click here.  On the inflation front, the prices paid index rose to 62.4 from 55.6 in May.  Rising costs for meats, cleaning products, and medical supplies (like N95 masks) lead the index higher.  The data will likely remain volatile over the weeks and months ahead as the virus – and state responses – impact the ability for companies to operate.   While cases have picked up in some states, we are far better prepared to combat the virus and serve those infected, which suggests less of a need for broad-based shutdowns like we saw in March and April. Pair the pandemic with the civil unrest, and the one certainty is that we live in uncertain times.  But history shows that, when push comes to shove, the US always responds.  We don't expect that this time will be any different. 

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Not since the 1960s and 70s has the United States experienced social upheaval like it is experiencing today.  We have protests (both peaceful and otherwise), and a massively divided political landscape.  On top of that, we have a virus that is spreading across the country, creating fear and an acceptance of economic shutdowns.

Originally, the scientists said we needed 15 days to slow the spread.  These same scientists have consistently lengthened the time they believe keeping the economy relatively closed is a good idea.  Yet, eventually, as the number of new cases of COVID-19 slowed, people revolted against these constraints and states began to reopen.  Now a pick-up in new cases, which many call a "surge," is causing politicians to reverse prior moves to re-open and they are now re-closing bars and restaurants again.

Yet, while these re-closures are happening, ordinary Americans are showing a desire to press for more freedom.  On May 31st 352,947 people went through TSA airport security checks.  On June 22nd, as reports of a surge in new cases started to appear, TSA counted 607,540 passengers.  If these reports of a surge are slowing activity, we can't see it in the TSA data.  On July 5th, 732,123 passengers entered airports.

Moreover, gasoline usage, which had been down about 50% from the year before at its worst back in April, is now down just 10%.  And Apple mobility data, which reflects requests for directions, bottomed in April, down nearly 60% from the January 13, 2020 benchmark. Since April, the mobility data has rebounded 19%.

In other words, while many seem to think that new cases and some reversals in openings will do the same kind of damage to economic activity that we saw in March and April, it does not appear that way at the moment.  This is likely one of the reasons that equity markets are recovering from their "surge-related" drop.  Last week, in a holiday shortened four-day trading week, the S&P 500 was up 4%.

Part of this was driven by the second straight month of job gains.  The US added 4.8 million jobs in June, and the unemployment rate fell to 11.1%.  Over the past two months, manufacturing has recovered 606,000 of its lost jobs, and these are unlikely to be affected much by the closure of bars and restaurants.

Because we put the odds of another nation-wide economic shutdown very low, we expect economic data to continue to improve in the weeks and months ahead.  On top of this, the M2 measure of money is up 25% in the past year, one of the fastest YOY rates we have ever seen.  With this flood of new money, and an improvement in economic data, equity markets should continue to rise.  And contrary to some views, we do not think the equity market is overvalued.

Many on both sides feel as if the world is falling apart, and we are certainly dealing with a series of issues that are causing uncertainty.  However, especially after the Fourth of July, it's important to remember history.

In the Civil War, the US lost 620,000 men, 2% of the population, the equivalent of more than 6 million people today.  World War I, World War II and the Spanish Flu were devastating.  Yet, in every case, the United States continued to prosper.

We are completely aware of this history and the belief of many that this time is different.  But we will get back to normal.  It may not happen immediately, but it will happen.  Competition among states, businesses and everyday people to grow and enjoy life will push everyone to realize that we can't truly stop a virus.  Just like 9/11, people will fly again. They already are.  They will go to restaurants again, and sporting events and theaters. But it will take time.

Those expecting a complete "V-shaped" recovery for the economy will end up disappointed.  These first few months will look like a V, but then things will grow more slowly unless we get a widely distributed vaccine.  We may not see 4% or lower unemployment rates again until 2023.  Maybe longer. Day-by-day, week-by-week, month-by-month, progress will be made.

We remain hopeful.  We have history on our side. And we remain bullish on equities. Companies, like the rest of us, are adapting. They are figuring out how to limit losses - and grow - in this uncertain time. They too will emerge stronger when this storm has passed. 

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist

Click here for PDF version

Source: St. Louis Federal Reserve FRED Database

Sources: First Trust Advisors, Department of Labor, Redbook Research, Box Office Mojo,  Association of American Railroads, American Iron and Steel Institute,  Hotel News Now, Opentable, Transportation Security Administration, Energy Information Administration

1 Data for level, year ago level, and month ago level are all YOY % changes.

2 Data is provided daily instead of weekly.

3 Data shows year-over-year seated diners at restaurants on the OpenTable network across all channels: online reservations, phone reservations, and walk-ins. % change month over month is the current reading minus the month ago reading.