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For consumers to recover, the services sector has to fully reopen.


For the past several months, we have been tracking a series of economic and market data to help identify whether the rebound in activity after May was going to turn into a sustainable recovery (reach past pre-recession levels) or would eventually flatten out below prior levels.  This week, we thought it would be helpful to lay out some things that could help in the immediate term and some things that could help in the intermediate- to long-term. 

In the immediate term, consumers need income.  This is likely going to come in the form of a renewed fiscal policy initiative that will be focused on providing payments to workers that are unemployed to prevent them from running out of benefits (either because they are past the state expiration or because they are not normally covered by unemployment).  Many of the initial policy responses have lapsed or will soon expire (enhanced unemployment payments ended in July, PPP ends in October and has mostly been spent, the executive order unemployment payment expansion has been used up in most states, and the pandemic emergency coverage expires at the end of 2020).

Source: Hedgeye.

Source: Hedgeye.

 Source: Hedgeye.

Source: Hedgeye.

These initial payments did help increase consumer incomes and helped spending recover faster than what was expected given the current level of joblessness.  Since these payments are not permanent, they are often treated differently than wage income, and for consumer activity to truly improve, employment needs to recover.

Source: FRED.

Source: FRED.

For employment to improve, corporate profits likely need to recover to a level that allows companies to rehire their workers.  Consensus estimates for 2021 earnings are above the level of 2019.

For this to have a high probability of occurring, the economy needs to recover in a meaningful and sustained manner.  A large portion of the U.S. and developed international economies and labor markets are tied to the services sector. 

These businesses have been impacted more directly by COVID-19 (either because policy makers have put restrictions in place or because people have avoided these businesses) than manufacturing and production.  One place where this has been evident is the PMI data comparing manufacturing and services.  During the March and April lockdowns, the Global Manufacturing PMI survey bottomed at 40, compared to 23 for the Services PMI.  The Global Services PMI has also started to decline again, led by countries in Europe that have been experiencing rising COVID cases (France and Spain have both dropped back below 50).  The breadth of the Manufacturing and Services PMIs have started to diverge as only 50% of the countries with a Services PMI survey were above 50 in September, compared to 71% for manufacturing.  In September, 74% of countries reported a month over month increase in their manufacturing survey compared to 41% for services.  The Services PMI in the U.S. declined slightly in September and manufacturing was flat. 

Areas that have had a harder time containing the virus have experienced declines in mobility and activity and the services area has slowed.

Source: World Health Organization.

 Source: World Health Organization.

 Source: World Health Organization.


Source: World Health Organization.

Getting the virus under control will likely have the biggest near-term impact on the U.S. and developed market economies, as this should allow service-based businesses to operate at full capacity.  Consequently, this likely would allow companies to get back to profit levels that lead to more hiring, which increases consumer incomes. 

In the intermediate- to long-term, it will be helpful to create a set of fiscal and monetary policy initiatives that can lead to broad economic growth that gets back to prior levels of production and employment, instead of only impacting asset prices that have a narrow impact on a small portion of the population

Source: FRED.

Source: FRED.

Source: FRED.

Source: FRED.

 

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.