Pro Perspectives 6/16/20

June 16, 2020

We talked yesterday about the simple math that tells us that the response from policymakers over the past three months was far greater than the economic damage, derived from the nation-wide stay-at-home orders.

That means we're going to have a lot of excess money floating around the economy.  And that means a big bounce back in growth is coming.  And with it, inflation is coming too, as we have frequently discussed here in my daily notes. 

It's a matter of how big the bounce back will be, and how much inflation.

On that note, we had more evidence today that suggests the pessimistic projections on Q2 GDP is going to be proven very, very overly pessimistic.

We've already seen big surprises rolling in from the May data: personal incomes (record year-over-year change), savings rates (record high), along with a huge positive surprise in the May jobs report.    

Today we had a look at May retail sales.  Remember, the economy started opening up in late April, starting in Georgia.  So as we look at May data, we're getting early information on behavioral changes as people get back to some semblance of day-to-day life.  Is there a new normal, or will people go back to their lives?  

As we discussed here back in early May, the April data on the health crisis had already told us the bottom was in, and the worst case scenarios were off of the table.  And with that, we were set up to beat some very low and conservative expectations that were set by public officials.  

Indeed, that's what we're seeing.  In the chart below, you can see what it looks like when people are asked to stay at home for two+ months, but remain attached to their jobs and remain financially strong/solvent.  When orders are lifted, they go out and spend. They go back to their life-learned patterns and behaviors.   

Unlike the Global Financial Crisis, this is not a situation where overindebtedness and the lack of confidence in future employment has kept people in their bunkers, preserving cash.  This is/was a health crisis, that could have spilled over into a crisis of confidence, which could have caused lasting damage to the economy. 

The good news:  The data that's rolling in is building the case that the crisis of confidence has been avoided.  And that has everything to do with the policy response, by putting money in the hands of consumers, keeping them attached to jobs and protecting the balance sheets of consumers and companies.