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Economic data points have rebounded from the bottom, but can they sustain that momentum?

 


As states removed mobility restrictions in May and June, economic data points improved from weak levels.  This has included consumer and business sentiment indicators, payroll data, consumer spending, and to a lesser extent production data.  Much of these gains have been driven by the return of workers to businesses that were temporarily closed or required to operate at limited capacity.  As those restrictions went away, the expectation was that employment and activity in those areas would improve.  Some travel-based areas are still facing mobility restrictions and a lack of demand that could persist.  What we are interested in trying to determine is how sustainable is the rebound in the recent data.  To figure this out, we can look at some of the labor market data to see what is driving the recent gains and if there are signs of permanent impacts beyond the current virus-related restrictions.

The June payroll report showed a record monthly increase at close to 5 million.  Combined with the gains in May, around 1/3 of the payrolls lost in March and April have been recaptured. 

Source: FRED.

Source: FRED.

Source: FRED.

Source: FRED.

Most of the gains in June were tied to the reopening of service businesses, as 60% of the new payrolls were from leisure/hospitality and retail trade.  Total payrolls in these industries are still 10%-30% below their earlier peaks but much progress has been made since the start of re-openings.  The payroll report is based on data from mid-June and took place prior to the increase in COVID-19 cases and the announcement of more store closings and mobility restrictions. 

Source: FRED.

Source: FRED.

Source: FRED.

Source: FRED.

Since the payroll data was collected, there have been multiple months of initial jobless claims above 1.5 million based on state programs and close to 2 million when including the extended coverage for workers not covered by traditional unemployment insurance. 

Source: FRED.

Source: FRED.

In the most recent report, continuing jobless claims increased to 19.29 million based on data through the end of June.  These data points suggest that hiring activity has likely started to slow and that some of the recent job losses are not related to mobility restrictions and are tied to businesses closing or permanently reducing their payrolls. 

Source: FRED.

Source: FRED.

This can also be seen in the increase in permanent unemployment, which increased by 588,000 to 2.88 million in June. 

Source: FRED.

Source: FRED.

The number of people who have been unemployed for longer than 15 weeks increased by over one million in June and now represents more than 18% of the total number of unemployed workers. 

Source: FRED.

Source: FRED.

Along with the labor market data, we are seeing other measures of activity slowing below prior levels including credit card spending, mobility data, and open table orders.  Activity in some of the states reporting the highest COVID-19 cases is starting to stall or decline after getting back above pre-virus levels. 

Source: Hedgeye.

Source: Hedgeye.

Source: Dallas Fed via RenMac.

Source: Dallas Fed via RenMac.

If these trends in mobility and labor market data continue, they will likely suggest that the economy has rebounded from the worst of the recession but is running out of the momentum needed to get back to pre-virus levels.  Companies will start reporting Q2 earnings, which should provide some insight into how companies plan to hire and spend in the second half of 2020 based on the current landscape.

 

Rank Dawson, CFA
Vice President, Research and Strategy
Boyd Watterson Asset Management, LLC

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.