Global| Jan 19 2021This Is Not A Recovery: Lessons From 1980
|in:Viewpoints
Summary
The statistical bounce off a record plunge in economic activity linked to the pandemic has proved to be short-lived. The economy is not moving forward in a sustainable way, evident by three consecutive monthly declines in retail [...]
The statistical bounce off a record plunge in economic activity linked to the pandemic has proved to be short-lived. The economy is not moving forward in a sustainable way, evident by three consecutive monthly declines in retail sales.
Last April, I argued that relaxing the restrictions too soon to combat the Covid virus runs the risk of the second wave, more serious than the first one. That's what happened in 1980 when the economy faced an "inflation virus" and the federal government imposed credit-controls to break it from spreading. That quick-fix didn't work. More draconian government measures followed, sending the economy into a more protracted downturn.
In the past month, the number of new "Covid" cases has jumped to record highs, supporting the view of medical experts that not enough was done in the spring months to break its transmission. The coronavirus curve can be broken only by medical science. And the bad news is that the current spread of the Covid-virus is moving faster than the vaccine administration program can keep pace.
It's too early to sound the alarm on the recovery but record-high covid cases, a rebound in jobless claims, and three consecutive monthly declines in retail sales are not the recovery-script.
Retail Sales & Covid
December's retail sales declined by 0.7%, the third consecutive monthly decline. Excluding the volatile motor vehicle and gas station sales, retail sales fell 2.1 %, 3X times the drop in the headline figure, and are off nearly 4% in the last three months.
Weakness in retail sales was apparent in business establishments that have been hurt and also benefited from the pandemic. Sales at eating and drinking establishments fell 4.5% last month, while online sales also plunged more, declining 5.8% in December. And sales at both of these retail establishments fell in November.
Retail sales have been the bright spot in the consumer space. Spurred early on by federal support payments, pent-up demand, and monies not spent on travel. recreational and entertainment retail sales surged to a record level in Q3.
Going into Q4 retail sales had a lot of momentum and a number of factors pointing to more gains. To be sure, consumers were sitting on a double-digit saving rate, record wealth, and strong job gains as millions of people were being rehired. But retail spending hit a wall in Q4.
Analysts will quibble over what economic factors are responsible for the abrupt and sharp decline in retail sales but in my view, the record rise in Covid cases is disrupting the normal flow of commerce. There is a direct and indirect link between Covid cases, jobless claims, the number of people working remotely, and the propensity to spend.
Let's assume that half of the more than 200,000+ plus cases are people that are employed. That means 700,000 each week (nearly 3 million a month) are displaced from work for a period of time, and that's not counting the people that came in close contact. Also, as Covid cases spike in towns and cities local governments are forced to impose stricter restrictions on businesses triggering more layoffs.
In 1980, the second wave of inflation proved to be more damaging than the first, and in 2020 the second wave of Covid cases is far more damaging in scale and breadth than the initial count of last March/April.
Here's a simple checklist for a sustainable economic recovery; the number of Covid cases and jobless claims are halved, followed by a sharp decline in the number of people working remotely. The latter is often overlooked as a catalyst for growth, but it shouldn't be as a mobile worker touches more parts of the economy compared to a remote worker, and also has a higher spending multiplier.
Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.