Implications:  New orders for durable goods continued to climb higher in August, though at a slower pace than the consensus expected as the growth of orders cooled from the fastest 3-month pace in series history dating back to the early 1990's.  With a combined 39.0% increase since the April bottom, new orders now sit just 5.4% below the February pre-pandemic high, signaling a sharp recovery in the manufacturing sector.  The volatile transportation sector lived up to its name once again, with a sizeable rise in orders for commercial aircraft being largely offset by a drop in orders for motor vehicles.  Excluding transportation, orders rose 0.4% in August and have now broken above the levels seen to start the year.  Among the core non-transportation categories, orders activity was mixed in August, with machinery (+1.5%), computers & electronic products (+1.2%), and primary metals (+1.2%) rising while electrical equipment (-1.5%) and fabricated metal products (-1.3%) declined.  One of the most important pieces of data from today's report, shipments of "core" non-defense capital goods ex-aircraft (a key input for business investment in the calculation of GDP growth), rose 1.5% in August.  Even if these orders remain unchanged in September, this measure will be up at a 30.8% annualized rate in Q3 versus the Q2 average, suggesting that business investment, which was a major drag on real GDP in the second quarter, will be a major tailwind in Q3.  While this represents growth from a very low base, Q3 is on track to see real GDP growth in the 25 - 30% range.  The Atlanta Fed's "GDP Now" model had Q3 growth at a 32.0% annual rate going into today's report, but we are sticking with a slightly more conservative forecast as inventories may remain a source of weakness.  We also expect the economy will continue to grow at an above-trend pace in Q4 and through 2021, but the road to recovery will be a long slog back.  What matters most, is that we have started our way down the path.

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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:  The impressive rally in new home sales continued in August, beating even the most optimistic forecast by any economics group and posting a fourth consecutive gain. Remarkably, August new home sales are now 30.6% above the January pre-COVID-19 high and crossed above a one million annualized sales pace for the first time since 2006.  A couple of factors should continue to keep new home sales strong in the months ahead.  First, affordability; near zero interest rates from the Federal Reserve have helped reduce 30-year fixed mortgage to record lows.  Second, due to the pandemic and urban unrest, buyers' preferences look to be shifting away from units in denser urban environments, toward the more spacious options in the suburbs where most new single-family homes are built. Finally, there is still pent up demand from potential buyers whose purchases were temporarily disrupted by lockdowns and widespread economic uncertainty in the wake of the pandemic.  However, a lack of finished new homes waiting for buyers could be a headwind for sales going forward.  In the past year, the only portion of the inventory of unsold new homes that has increased are homes where construction has yet to start.  Meanwhile, the inventory of unsold homes that are either under construction or finished is down from a year ago.  Given the downward pressure that social distancing regulations, shortages of labor, and supply chain issues continue to exert on new construction, we do not expect an oversupply of homes anytime soon.  This is reflected in the months' supply (how long it would take to sell today's inventory at the current sales pace) of new homes for sale, which has collapsed from 6.8 in April during the height of the pandemic to only 3.3 in August, the lowest level on record going back to 1963! Surprisingly, median prices were actually down 4.3% from a year ago in August despite the drop in inventories, but this looks to be the result of a shift in the mix of homes sold towards lower priced properties and not a sign of falling unit prices. As a result, look for home prices to rebound in the next several months and new construction to accelerate to meet demand.  In other recent housing news, the FHFA index, which measures prices for homes financed by conforming mortgages, rose 1.0% in July and is up 6.4% from a year ago, an acceleration from the gain of 5.2% in the twelve months ending in July 2019.  On the employment front this morning, initial jobless claims rose 4,000 last week at 870,000.  Meanwhile, continuing claims for regular benefits fell 167,000 to 12.58 million. These figures suggest further payroll gains in September as well as another decline in the unemployment rate. Finally, on the manufacturing front, the Kansas City Fed index fell slightly to +11 in September from +14 in August, remaining well in positive territory and signaling ongoing optimism in the factory sector following deeply negative readings early on in the pandemic.

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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:    Existing home sales continued to impress in August, rising for a third consecutive month and hitting an annualized pace of 6 million units for the first time since 2006.  From February (pre-pandemic) to the bottom in May, sales collapsed 32.1% as lockdown measures and widespread economic uncertainty took hold across the country.  Remarkably, since then sales have made a full V-shaped recovery and are now up 4.2% from the previous February high.   It's also important to remember that existing home sales are counted at closing, so August's gain mostly reflects contracts that were signed in June and July. This was smack dab in the middle of the "second-wave" of coronavirus cases erupting across the country, signaling the resilience of the ongoing housing market recovery.  One major contributor to the recent recovery has been the Fed's liquidity policies, which have pushed 30-year fixed mortgage rates to record lows, boosting affordability. In fact, demand for existing homes has remained so strong that 69% of homes sold in August were on the market for less than a month.  That said, sales face a continued headwind from the low inventory of existing homes. Today's report showed that inventories were lower than any other August on record and down 18.6% versus a year ago (the best measure for inventories given the seasonality of the data).  This inventory shortage is especially acute for homes on the lower end of the price spectrum, with sales of properties worth $250K or less actually down from a year ago, as sellers mark up sales prices to respond to surging demand. Meanwhile, sales of properties worth $1 million and over are up 44% in the past year, as wealthy urban dwellers purchase properties elsewhere to escape pandemic-related restrictions.  This shift in the mix of homes sold has put considerable upward pressure on median prices, which are now up 11.4% in the past year versus a year ago comparison of 6.7% in January.  However, with employment growing, new and future construction boosting inventories, and an easy Fed, which will keep short-term rates near zero well into the future, expect sales to continue at a robust pace in the months ahead.  Finally, on the manufacturing front this morning, the Richmond Fed Index rose to +21 in September from +18 in August.  This is the highest reading for the index since 2018 and continues to show a healthy rebound in manufacturing activity versus the deeply negative readings early on in the pandemic.

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The second quarter of 2020 was the mother of all economic contractions.  Real GDP shrank at a 31.7% annual rate, the largest drop for any quarter since the Great Depression. 

However, based on the economic reports we've seen so far, it looks like the third quarter will be the mother of all economic rebounds.  Even if industrial production and retail sales are flat – unchanged – in September, they will still be up at 37.6% and 60.1% annual rates, respectively, versus the second quarter average.  Total private-sector hours worked would expand at a 25.6% annual rate.  Housing starts would be up at a 218% annual rate.  (No, that last one is not a typo.)     

The GDPNow tracking model, created by the Atlanta Fed, is forecasting that real GDP grew at a 32% annual rate in Q3.  We're waiting for data on inventories and net exports (which may pull down GDP growth) before committing to a growth rate over 25%.  But, either way, it's going to be the fastest real GDP growth for any quarter since World War II and we all knew it was coming.

The first thing to recognize is that even if the real GDP growth rate in the third quarter equals or exceeds the percentage drop in the second quarter, the economy is still in a very big hole.  To illustrate this point and putting aside that GDP figures and percentage changes are annualized (which is a whole other issue), let's take a company that produces 100 dresses each quarter.  If production drops 20%, that means it goes down to 80 dresses.  If production then goes up by 20%, that growth rate is from a lower base (80, not 100), so a 20% gain just gets you back to 96 dresses.  It's harder to grow out of a hole than it is to dig one.

The bottom line is that a full economic recovery in the US is still multiple years away.   The surge in growth in the third quarter is largely related to many businesses going from a total lockdown to a new COVID-19 normal.  Production and construction six feet apart, no fans in the stands, and 50% occupancy.  Meanwhile, many small businesses (and some not so small) have simply disappeared.

This suggests that although growth should continue after the third quarter, it's not going to be nearly as fast.  You can only re-open your business once, not again and again (unless lockdowns happen again, which would send the economy back into negative territory).

We don't think we get back to the level of real GDP we saw in late 2019 until late 2021.  And that's really not a full recovery because, in the absence of COVID-19, the economy would have grown 2% or more, per year, in the interim.  If we define a "full recovery" as getting back to an unemployment rate at or below 4.0%, we'll probably have to wait until 2023.   

The pace of the recovery in 2021-22 will depend not only on the course of COVID-19, as well as development of vaccines, and therapies, but also public policy.  Reducing overly generous unemployment benefits, even if gradually, would help get many back to work.  

Some investors might be concerned about tax and regulatory increases in 2021, but it appears increasingly likely that any tax increases would not kick in until at least 2022 and maybe 2023. 

If Joe Biden wins the Presidency and the Democrats take the US Senate, it would likely be by a very narrow majority.  In that instance, we would imagine at least several Democrats balking at immediately imposing tax hikes.  Remember, when President Obama took office in 2009, the Democrats had 59 seats in the US Senate, and taxes didn't go up until 2013.  This was because Democrats were hesitant to hike tax rates when unemployment was high and the economy was slowly recovering from the Financial Panic of 2008-09.

In addition, a President Biden would likely face a federal judiciary that more strictly limits federal regulators to issuing rules that stick to the laws passed by Congress and don't go beyond. This makes executive orders "increasing" the power of regulators harder to push through than those that "limit" those powers.  And the Supreme Court may get a new member soon.              

Either way, don't expect the rapid growth in the third quarter of this year to last.  It's going to be a long slog back.   

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

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Source: St. Louis Federal Reserve FRED Database

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.