Pro Perspectives 5/15/20


May 15, 2020

With the April economic data continuing to roll in, let’s take a look at the damage.

This morning, we had retail sales.  The year-over-year decline was 21%.  And industrial production was down 15% in April, compared to a year ago.

This has people talking about the evolving predictions on Q2 GDP.  The Atlanta Fed’s model, at the moment, is projecting a down 42% for the quarter.

That’s a huge number.

Here is what that evolution looks like, as we sit half way through the second quarter. 


But we still have plenty of data to digest for Q2, over the coming six weeks.  And this Atlanta Fed model has wild swings in relatively normal times.  I suspect we will see an aggressive swing in this chart too, the other way. If you’re betting on a down 42% Q2 GDP number, I’ll take the other side.


Let’s take a look at a couple of surprisingly solid data points …

Surprise #1:  We just went through two months a government directed national lockdown, on the basis of a highly infectious deadly disease, which has led to mass unemployment, and yet the consumer’s expectations on the outlook remain much healthier than at the depths of the financial crisis.

Surprise #2:  Next, here’s a look at U.S. capacity utilization.  What’s notable in this chart?  It’s not zero. Despite what is described as an “economic stoppage,” the economy still operated at almost 65% capacity in the month of April.
With this chart above in mind, remember, the Fed, Treasury and Congress have flooded the economy with stimulus that amounts to more than a quarter’s worth of GDP.  This response implied economic data that would print down 100%, and capacity utilization at zero.  That hasn’t been the case.  With that, when it’s all said an done, the magnitude of the Q3 and Q4 GDP bounceback might make the Q2 decline look small.