A speedbump on the economic road to recovery

The U.S. economy decelerated in July with a surge in COVID-19 cases across wide swaths of the country.

August 17, 2020 – After solid job growth and robust consumer spending readings in May and June, the U.S. economy was cruising along at a decent speed of recovery. Incoming economic data for the month of July, however, showed that the economy decelerated with the speed bump of a surge in COVID-19 cases across wide swaths of the country. Job growth decelerated to a gain of 1.8 million jobs, down from the 4.8 million jobs added in June. A decline in consumer confidence was even more concerning, as more consumers became worried about future economic conditions. Real-time data provided by Opportunity Insights showed nearly flat spending growth throughout the month of July.

Following the sharp 32.9 percent (annualized) contraction in GDP growth in the second quarter, we expect GDP growth to accelerate to a 27.9 percent annualized pace in Q3 and an additional 8.8 percent in Q4. However, considerable uncertainty remains about growth in the second half of this year as expiring enhanced unemployment insurance benefits are set to run out at the same time that several other stimulus programs have run their course. This month’s upward revisions to our economic outlook represent both a better understanding of the depth of the contraction in Q2 as well as our updated assessment for a slightly faster rebound in business investment. In addition, trade and inventory building are making solid contributions to the GDP with the return of global demand. We expect GDP to contract 4 percent in 2020 before rising 4.9 percent in 2021.

Highlights:

Activity appears to have slowed in July
Stronger GDP growth expected in the second half of the year
Services spending lags this recovery
No further stimulus is assumed

Nominal consumer spending on goods and services (SA, YoY^* percent change)

Line graph illustrating goods services spending in August 2020. See image description for more details.

Spending on goods bounced back to 4.13 percent in June, after declining 13.51 percent year-over-year (seasonally adjusted) in April and 1.84 percent year-over-year in May, compared to spending on services, which dropped 8.9 percent year-over-year in June, 13 percent in May, and 17.56 percent in April.

^*Seasonally adjusted (SA), year-over-year (YoY).
Sources: Visa Business and Economic Insights and U.S. Department of Commerce

The great spending split

Nominal consumer spending activity continued to rebound in June, rising 5.6 percent month-over-month (MoM). More forward-looking indicators point towards flat nominal spending in July relative to June as COVID cases surged throughout several parts of the country. One unique trend in this recovery has been the pronounced difference in spending bouncing back for goods compared to services.

There has been a pronounced V-shaped recovery in YoY growth of goods (chart P.1, right) as consumers are more easily able to substitute e-commerce spending for face-to-face spending compared to services. In contrast, services spending continues to struggle and remains well below last year’s levels. This bifurcation in the way consumers are spending, in part, explains why manufacturing activity has bounced back so quickly while other more services- focused industries are facing a slower recovery.

Given that services spending made up roughly 60 percent of total consumer spending as of June, it is clear that without a stronger rebound in services spending, overall consumer spending will take longer to recover. We do not anticipate positive YoY growth in nominal spending until the second quarter of 2021.

Potential income cliff on the horizon

In this month’s forecast update, we have become more pessimistic about the MoM gains in consumer spending in the coming months. The primary reason is the expiration of enhanced unemployment benefits of $600 per week at the end of July. While a newly issued executive order is set to restore $300 to $400 of this benefit depending on the state, the funding source for the benefit may only last a little over a month by our calculations. With so many individuals still unemployed, we anticipate that consumer spending will be softer in the months ahead. We now expect the Nominal Personal Consumption Expenditures (NPCE) to contract 4 percent this year and bounce back by 5.8 percent in 2021.

Key assumptions and risks

As with any forecast, some assumptions have to be made in order to project beyond the current quarter. Our forecast assumes that no further stimulus packages are passed through the end of 2021 and future surges in COVID-19 cases will not result in a widespread shutdown of the economy. Of course if a stimulus package is passed, there would be some upside risk to our forecast depending on the provisions included, while widespread shutdowns, in our view, would dramatically increase the probability of a double dip recession.

Forward-Looking Statements

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