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.

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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 and year ago level are 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:  After briefly hitting a snag in September, industrial production regained its upward momentum in October, rising 1.1%.  Moreover, the readings in prior months were revised higher, and when included with the headline number boosted October's gain to 1.7%.  Industrial production has now made up 66.1% of the decline in activity seen during the height of COVID-19 lockdowns back in March and April, but still has a way to go.  We expect a continuing rebound in the factory-sector in the months ahead, and here is why. This morning's report on retail sales showed consumer spending up 4.9% from its February pre-pandemic level, and personal consumption spending on goods is up 7.7% from February to September. The pandemic has clearly shifted consumer preferences from services (like travel or attending sporting events) toward goods, and that represents a strong source of demand for US factory output going forward. Looking at the details, the biggest source of strength in October came from non-auto manufacturing, which rose 1.0%. Meanwhile, auto manufacturing slipped 0.1% in October.  Keep in mind that auto manufacturing has already made a full V-shaped recovery and is now up 6.9% from a year ago while non-auto production is still down 4.7% over the same period.  Look for monthly gains in non-auto manufacturing to continue to outstrip readings from the auto sector as the former series continues to make up ground.  The biggest drag on activity in October was mining, which fell 0.6% as declines in oil and gas extraction more than offset gains in ore and mineral extraction.  In other recent factory-related news, the Empire State Index, a measure of New York factory sentiment, fell to +6.3 in November from +10.5 in October. On the housing front this morning, the NAHB index, a gauge of homebuilder sentiment, rose to a new record high of 90 in November from 85 in October.  Look for housing starts in 2020 to post the highest annual reading for any year since the crash in housing more than a decade ago.

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Implications: A solid report today on the US consumer. Retail sales rose 0.3% in October, coming in short of the consensus expected gain of 0.5%.  However, including upward revisions to prior months, retail sales grew 0.7%.  It's important to keep in mind how much progress has been made.  Back in April, retail sales were down 19.9% from a year ago; now, in October, retail sales are up 5.7% from October 2019.  For some more perspective: from February (before the COVID shutdowns started) to the bottom in April, retail sales fell 21.7%.  Now, with the increase in October, we are 4.9% higher than the February pre-COVID high-water mark, meaning retail sales have had a full V-shaped recovery and are now starting to trace out a checkmark. The gains in sales this month were not as broad-based as previous months with only five of thirteen major categories increasing in October. However, this shouldn't be surprising as its unrealistic to expect the rapid growth rates from early on when the economy began to reopen to be sustained indefinitely.  Non-store retailers led the way higher, up 3.1% on the month and now up 29.1% in the past year.  It was less than two years ago that non-store retailers surpassed general merchandise stores for share of consumer spending, and the pandemic – which brought us inside and online – has continued to accelerate the shift toward digital shopping.  Expect further gains in the months to come for non-store retailers as some states start to add back restrictions as COVID-19 cases continue to rise. "Core" sales, which exclude the most volatile categories of autos, building materials, and gas station sales, rose 0.1% in October, and are now up 5.3% from a year ago.  After a massive rebound in real GDP in the third quarter, Q4 real GDP so far looks like it is growing around 5%.  Also today on the inflation front, import prices declined 0.1% in October, with a 1.9% drop in fuel prices, which more than offset higher nonfuel prices.  Meanwhile, export prices increased 0.2%, led by agricultural exports, which rose 3.4%.  In the past year, import prices are down 1.0%, while export prices are down 1.6%.

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Give Thanks!  The US economy continues to heal.  Payrolls keep growing, unemployment claims - though still elevated - are shrinking, key measures of the manufacturing and service sectors remain well into positive territory, and, as this week should show, both retail sales and industrial production remain on an upward trajectory.

While some investors are concerned about the near-term outlook for the economy given the recent increase in cases of COVID-19, we have yet to see signs of a double-dip recession.  Yes, some locations have begun imposing new limits on economic activity, and others may follow.  But businesses have come a long way, learning how to adapt and move forward from the mid-March environment, back when dealing with COVID-19 was brand new.

Think about businesses built around people commuting to work or leaving the office and going out to lunch; those operations have already shrunk substantially, putting another decline of that magnitude virtually out of the picture.  Meanwhile, consumers have shifted their spending, generating jobs elsewhere.  For example, home improvements are on track to hit a calendar-year record high in 2020.  Housing starts will be the highest for any year since the crash in housing more than a decade ago. Warehousing & storage jobs are at a record high, as are courier & messenger jobs.

We don't have the data yet, but migration between states and cities appears to have picked up substantially in 2020, as people leave areas that have experienced either excessive violence or draconian pandemic-related lockdowns.  This is just another piece of evidence that businesses and individuals have found ways to continue being productive in the face of unprecedented events.  For this, and other reasons, we don't see a double-dip recession.

Imagine being told back at the beginning of 2020 that the world was about to be hit by a global pandemic that would lead to massive government-imposed shutdowns of business activity around the country.  Imagine being told that we were going into a sudden (and sharp) recession which would see the largest single-quarter decline in economic activity since the Great Depression.          

As an investor with that knowledge, what would you have done?  Would you bail out of the stock market completely, or go all-in?  We watched many run for cover as stocks fell sharply.

And yet, as of the close on Friday, the S&P 500 was up 11.0% year-to-date, and that doesn't include reinvested dividends.  The market is up for a number of reasons. 1) The S&P 500 includes many large tech companies that we could not have lived without, and many companies considered "essential." 2) The Federal Reserve pushed the discount rate down significantly.  3) Government stimulus helped support consumer spending.  4) Companies adapted and lowered expenses, and 5) Many people accepted the risk of behaving somewhat normally as they looked at the data surrounding the virus.

The resilience of the economy and corporations has rarely been tested as it was this year.  This experience, combined with recent announcements about vaccines and therapies, will lead to further economic growth.  When a business had no idea how long it would be before a vaccine for COVID-19 was available, it made sense to postpone some investments indefinitely.  But when the distribution of an effective vaccine looks like it's around the corner, they can begin to take action on long-term plans even before the economy is fully healed.  Much of the uncertainty – be it about vaccines, the Supreme Court, or the elections - has now more or less passed.

Some uncertainty remains, it's never fully gone, but when we compare the unknowns of today to that of just seven months ago, the risk to remaining invested in great companies has substantially declined.  Give thanks for progress. A double-dip, while always possible, is unlikely. 

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

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Source: St. Louis Federal Reserve FRED Database

Implications:  Producer prices continued to rise in October, and are up at the fastest six-month annualized pace in nearly a decade at 4.7%, a sharp rebound from the steep price declines earlier this year.  Prices for both goods and services pushed the index higher, continuing the relatively broad-based movement in inflation over recent months.  Digging into the details shows that a key contributor to the October rise came from final demand goods, up 0.5%.  In particular, food prices had an outsized impact, as rising costs for vegetables, meat, and eggs pushed the food index up 2.4% on the month.   Energy prices rose 0.8% in October, led higher by rising costs for gasoline, which were partially offset by declining electricity prices.  Strip out the typically volatile food and energy categories, and "core" producer prices rose 0.1% in October.   Within core prices, transportation and warehousing were key movers in October, with long-distance motor carrying costs increasing 1.9% as a continued shortage of delivery drivers put upward price pressure on rates.  With the lumber shortage continuing, as well, the index for hardware, building materials, and supplies retailing also remains a standout, rising 7.3% in October and up at a staggering 174.5% annualized rate in the past three months.  Core producer prices are up a modest 1.1% over the past twelve months, but expect that to move higher in the months ahead.  Supply constraints, limitations on activity, and the general economic disruptions related to COVID-19 will continue to muddy the data for the foreseeable future, but what is clear is the massive increase in the M2 money supply, up 24.2% in the past year.  Once the dust finally settles – and it eventually will – we expect inflation to trend back to 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, businesses operating at limited capacity will remain a headwind for 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 0.3% in October, while intermediate demand unprocessed goods rose 2.6%.  Both intermediate demand categories continue to show prices broadly lower compared to year-ago levels.  The data are starting to shift higher, though, 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 expect growth will march onward through the close of this year and beyond.

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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.