The resurgence of COVID-19 and its impact on the reopening of businesses has gotten a lot of attention lately. Moreover, the news on initial claims for unemployment insurance staying in the 1.4 million per week range has generated concerns that the recovery has stalled out. Meanwhile, we have gotten a lot of information on the second quarter that provides clues for prospects ahead.
Real GDP declined 9.0 percent in the second quarter (32.9 percent annual rate), following a 1.3 percent drop (5 percent annual rate) in the first quarter. Both personal consumption expenditures and business fixed investment collapsed early in the spring as the lockdown took hold. Despite this being the largest quarterly drop on record, it was smaller than most analysts had expected. Worth noting is the plunge in spending in March (and April) had a bigger impact on the second quarter data than data for the first quarter. But since April, business and consumer spending has rebounded.
Looking at spending data for June, another big increase in consumer spending on big-ticket durable goods contributed to a cumulative increase that more than offset the declines early in the spring. Indeed, durables spending in June stood 8 percent above its peak in January! This tells us that people are willing to stick their necks out and spend, despite the lingering pandemic. Spending on nondurable goods in June also exceeded its previous peak. Accounting for all of the shortfalls of personal consumption expenditures was spending on services—hairdressers, dentists, childcare, and so forth—which in June were still 12 percent below their February peak.
Household willingness to spend has also been evident in the housing market. New home sales continued to surge in June and sales over the first six months of this year edged above the pace for the same period in 2019. Existing home sales also have been robust in recent months. While historically low mortgage interest rates have encouraged many households to step into the market, trepidations about pandemic effects have had only a limited impact in holding them back.
Meanwhile, business demand for capital goods continued to strengthen through June, as evidenced by a second monthly increase in new orders for capital goods. Supporting the recovery in capital spending are indications that business uncertainty about the recovery has been receding at a time when financing conditions—including the stock market—have become more favorable for many firms.
The pickup in aggregate demand has outpaced production through June and retail and wholesale inventories continued to be drawn lower (perhaps you have been finding shelves empty for items that you have been trying to buy). As a consequence, producers will be needing to ramp up production in the period ahead to avoid further aggravating customers. This bodes well for employment.
Speaking of employment, perhaps you have been seeing more “Help Wanted” signs as of late. The ability to fill positions has been complicated by the $600 weekly supplement to those receiving unemployment insurance. More than 80 percent of those collecting unemployment insurance have been receiving more than they could get by returning to the workforce. At this point, it is unclear whether Congress will renew the supplement that expired at the end of July and whether the terms will be changed to encourage people to return to work. Unless the $600 is retained, the number of people returning to work will move sharply higher in the coming weeks and surpass those filing new claims. Of interest has been the relative stability of the total number of people collecting unemployment benefits, implying that about 1.4 million have been returning to the job each week.
On a separate note, corporate earnings reports for the second quarter have confirmed pervasive profit shrinkage, but the declines have been smaller than expected. The tech sector has been notably buoyant—consistent with the new highs being registered by the Nasdaq index. In the financial sector, banks have been reporting hits to earnings from loan loss provisions (based on their expected losses on loans from pandemic strains on borrowers). Loan losses are likely to be substantial over the quarters ahead, but various forbearance initiatives are clouding the extent to which they will worsen. Some borrowers will be able to resume making payments on their loans when forbearance ends, but many will go into default status. It will take some time before the actual pattern becomes clear. In contrast, banks have reported large profits from their securities trading operations in which they make markets in Treasury bonds and other securities. This suggests that they have been enhancing market liquidity by taking securities off the hands of investors when investors are heading for the exits and selling securities to investors when their appetites for these instruments return. In other words, they make profits from buying securities when prices are low and selling them when prices have risen.
Thus, the evidence from data on the quarter ending in June clearly points to a resilient economy in which households and businesses are ready to buy and producers need to step up their production to satisfy pent-up demands. Even though we may have entered a brief pause in the expansion, once the recent spread of COVID-19 is brought under control, the recovery will promptly regain its steam.
Check out Chapter 2 of my new book—Capitalism Versus Socialism: What Does the Bible Have to Say?—for more on how market economies deal effectively with shocks, such as pandemics. This includes how the making of profits, such as those realized recently by dealers in securities, is telling us that businesses are doing their jobs.