Imagine you are locked in your home and can only go outside of it to purchase the bare necessities (this would’ve sounded ridiculous in every year before 2019). For simplicity’s sake, let’s assume that you normally spend $100 every month, half of that on the basics. Thus, for the month preceding this lockdown you’d have laid out the full hundred and then just fifty for the first month under restriction as well as each one thereafter.
Assuming the shutdown was limited to two months, that would have meant you spent $100 total instead of the usual $200 for both. If you haven’t lost your job, this leaves you with an extra $100 in cash; and even if you had become unemployed, in our example we’ll make it up from the federal government’s generosity.
What is your spending the first month when everything goes back to normal? Assuming no second order effects, that Jay Powell did his job (stop laughing), it would be the usual $100 plus the $100 of purchases you had foregone for these non-economic reasons during the prior two months: $100, $50, $50, $200.
In other words, the $100 that you didn’t spend during the lockdown doesn’t just disappear forever. As soon as you’re able, you’re going to put that money where you would have had you been “allowed.” If instead the four-month progression went: $100, $50, $50, $110, we wouldn’t be ecstatic about the “extra” $10 that’s spent in Month 4, we’d be furiously concerned about where the other $90 went.
If you decided to save that $90, then that’s a procyclical, positive (meaning bad) feedback which spells trouble for the months ahead (especially if you are far from the only one who did this). If you simply don’t have that $90 because you didn’t have any income and the feds didn’t make up everything that you lost, also positive feedback.
With only non-economic factors involved, those four months of spending would add up to the full $400 no matter in what order; that’s the “V.” Anything less than $400 means an economic hole has been opened up, sending interested observers off to figure out why.
Obviously, this simple example is way too simple but it does suffice to demonstrate at least the basic outline of what a “V” recovery would look like if there are only non-economic reasons behind the dislocation. It’s the reverse of economic activity pulled forward by things like debt spending; economic activity that is prevented from happening at its usual time doesn’t just vanish forever, instead it merely gets pushed out into the future.
The Census Bureau reported today record levels of retail sales during July 2020. Yet, like PMI’s, it’s another example of what looks like a “V” that is only partway to really being one.
I’ll just use rough estimates here, not factoring baseline growth or anything like that. Total retail sales (seasonally-adjusted) in February had been $527 billion (and $529 billion in January). At the very least, had the COVID overreactions never taken place then we’d have expected $527 billion to have been consumed in every month through July (again, we’ll just forget about growth and January).
Back of the envelope, total simple baseline of $2.65 trillion for the five-month period following February.
Instead, from $527 billion to: $484, $413, $488, $529, and now the record high $536, March through July, respectively. That works out to a total of $2.45 trillion. We don’t look at July’s record high and think “V”, we see the small increase relative to February in July and begin to worry about where that other $200 billion might’ve disappeared to.
While $200 billion may not sound like much, that’s about 7.5% for the five months, which is Great “Recession”-sized. And when factoring in lost growth, the gap or economic hole pushes up closer to double digits in the negative. Massive.
Three months into reopening, the feds pouring as much cash as they could into everyone’s pocket, and despite “record” retail sales levels we are seeing instead how there must be economic factors at work here. Too many Americans have to be saving the cash for the months ahead, or not enough being made whole after what many had experienced over this period, some factor (including continuing as well as renewed shutdowns and restrictions) has either pushed that $200 billion even further into the future or has canceled some or all of it.
A rarity, mainstream commentary has (mostly) reacted soberly to this “record” consumer spending and what otherwise might appear like a completed “V.”
Economists attributed the increase in retail sales over the past three months to a $600 weekly unemployment benefits supplement from the government, which amounted to almost $75 billion in July. The supplement ended on July 31, leaving economists to expect a decline in retail sales in August.
As a consequence, these same “economists” continue to call for more “stimulus” in the form of renewed unemployment bonuses as well as direct cash (a repeat of the prior “helicopter” aid). Again, if all we were working against has been non-economic factors these wouldn’t be necessary; the private economy would be already close to its prior output potential, meaning earned income from work would rise quickly enough to close the gap without requiring more non-economic government bridge payments.
But, as separate data has shown, that’s just not happening, either, leaving for the federal government the role of offsetting lost income, and hoping that offsets spending. That’s not stimulus.
The so far “missing” retail sales (as well as services) begins to explain the far more sluggish rebound on the production side of the economy. The Federal Reserve reported today that Industrial Production, like consumer spending, continues to rebound with the reopened economy. Unlike retail sales, IP and especially manufacturing, remained well below its pre-COVID levels in July (and it’s been in a downturn for more than a year and a half).
Employing our simple analogy here, if you expect to make and sell 100 units of something each month, but if in the two middle months of a four-month segment you were prevented from doing so, producing only 50 in each, so long as you perceive only non-economic factors for you and your customers then there’d be 200 units produced in Month 4.
And if not straight away in that fourth month, the 100 units foregone get pushed only a little further into the future so at some near-term point they would eventually get produced, added to the shutdown-free regular monthly total. Very quickly, the activity shows up almost like a bonus itself.
While it’s not as easy to scale up on the production side to make up for lost time, we should expect some substantial degree of an obvious period of “catch-up.” There’s not even that on the horizon, production levels continue on significantly below February, meaning the production-side gap keeps getting bigger.
The only major sector where it didn’t was in automobiles. Unit auto sales, according to the BEA (whose estimates continue to differ wildly from Census’ retail auto sales), remain way below their prior peak (above) while motor vehicle assemblies are if modestly ramping back up after several months of being near-totally shutdown.
Record retail sales plus 2018 levels of vehicle production doesn’t add up to a “V”-shaped anything. The more economic activity that should have been pushed into the future doesn’t show up in the future, the more we know there are, indeed, economic factors which will have destroyed substantial parts of the economy.
And then the fun begins.