Key Takeaways
- Until last week, restrictions in place had yet to affect mobility meaningfully, and the composite real-time activity tracker (from the New York Fed) appeared to continue to make up ground on what was lost in the spring.
- Nevertheless, the recent surge in COVID-19 cases and increasing targeted localized activity restrictions mean the rest of November and December will likely see consumer spending held back.
- What is different this fall so far compared to the spring's nationwide lockdowns is that most of goods-producing sector such as construction, mining, and manufacturing have been spared of any rollbacks.
- Risk to our fourth-quarter GDP growth forecast (3.5% annualized from September) is tilted squarely to the downside. However, positive news on the vaccine front has removed some of the tail risk and growth may be better than expected in the first half of next year, which may see some activity pulled forward from what was anticipated to come during the second half of the year.
The U.S. economy is yet again at a precipice.
On one hand, COVID-19 cases have surged, risking fourth-quarter growth that bleeds into an early leading portion of the first quarter next year. On the other hand, at the same time, there have been encouraging announcements on the vaccine front since our last publication of this series, with couple of major vaccine makers--Pfizer/BioNTech and Moderna--announcing 90%-95% effectiveness of their trials so far, which raises hope of a vaccine in distribution sooner than expected. There is an upside risk to growth in the first half of next year, which may see some activity pulled forward from what was anticipated in the second half of the year.
S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic. Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by the middle of next year. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
COVID-19 Cases Keep Rising
COVID-19 cases continue to surge, sustaining highs not seen since the pandemic began, and record hospitalizations begin to strain the health care systems in some states and cities. State governors and mayors in some major cities have announced local measures of restrictions, but a majority of places have so far resisted full lockdowns (like in April), saying they know more about how the virus spreads and how to prepare hospitals than they did in the spring, and that they want to avoid hurting struggling businesses and households.
Still, it is likely that incidence of more (and stricter) locally administered restrictions on activity are in the cards in the coming weeks. Until last week, restrictions in place had yet to affect mobility meaningfully, and the composite real-time activity tracker (from the New York Fed) appeared to continue to make up ground on what was lost in the spring. This is consistent with our prior forecast for the fourth quarter. But we fear that the rest of November and December will increasingly see discretionary consumer spending held back more than we had anticipated by a combination of increased activity restrictions and household precaution--so much so that the overall consumer spending may see a decline instead of 3% (quarter over quarter annualized) growth in our September forecast. There will likely be more headwinds to dining reservations (which have started to decline again), air-travel (losing momentum from an already subpar level), and consumer sentiments (that have stalled out).
The Food, Recreation, And Entertainment Sector Is Hit The Hardest
What appears to be different this time around is that most of the rollbacks in openings so far have affected one industry disproportionately, which at a broad classification level combines arts, entertainment, recreation, accommodation, and food services (restaurants and bars). After all, it is the lowest hanging fruit for any policymaker given the objective is to minimize transmission of the virus. Will it be enough, or will policymakers be forced to move beyond just this industry? We will see, but what we know is that the value added by this particular industry has fallen to 2.5% from 4.25% (pre-pandemic peak), which means a retreat in food, recreation, and entertainment spending this winter from already depressed levels isn't great, but it also won't have the same impacts as the hard shutdowns of this past spring.
Activity in the goods-producing sector--construction, manufacturing, and mining--have by far avoided restrictions. High frequency indicators of demand and supply of the goods-producing sector have continued to be on the mend. New business applications and home purchase mortgage applications continue to hold their healthy levels, while demand of gasoline, steel production, and rail traffic point to ongoing recovery. Rig counts have started to increase from their bottom--finally--although it may be too early to celebrate given headwinds to global oil demand from the COVID-19 resurgence.
Unemployment Benefit Claims Remain Elevated
Both initial and continuing claims of unemployment insurance benefits were less encouraging last week, and the continuing claims declines of the last five weeks partly reflect the loss of eligibility. New applications of unemployment benefits for regular state (flow of new claimants) continued to move lower last week (723,000 not seasonally adjusted). But keep in mind that combined with Pandemic Unemployment Assistance (PUA), initial claims remain above 1 million, and the risk may be for more layoffs as coronavirus cases surge and some states impose restrictions on activity. Continuing claims for regular benefits (stock of benefit claimants) also extended their decline but with a key caveat: the lower stock of claimants of regular state benefits (most states provide 26 weeks of regular benefits) continues to be partly offset by the rise in the number of unemployed individuals who are now supported by the extended benefit program (instated as part of the CARES Act), which is set to expire at the end of the year. More folks remain unemployed for longer, and this is a worrying sign—increasing risk of more long-lasting labor market scarring.
| Indicator | How the data looks |
|---|---|
| Reopening of the U.S. states | The majority of states remained open or continued reopening, despite a surge in new cases. That said, looking ahead, an increase in pauses and roll-backs of opening is likely for the coming weeks. |
| New COVID-19 cases | New cases continue to surge, pushing hospitalization up. The fatality rate, which lags new cases, however, is still well below summer. |
| Google mobility | Mobility for retail and restaurants largely remains stable in the U.S. (still 17% below February levels), while in New York and California, it is around 25%. This reflect the variation in mobility between states as people are cautious due to surging COVID-19 cases. |
| Weekly economic activity index | The composite index continued to climb out of the trough through the first week of November even as virus related uncertainty about the recovery increased. |
| Johnson Redbook Index | The same-store sales growth slowed to 1.1% year over year for the week ended Nov. 7 after peaking to a two-month high in the previous week. Sales growth continues to hover around 1%-4%. |
| Consumer sentiment | Still well below pre-COVID-19 levels, October consumer confidence largely remained steady from the previous month. Consumers remain uncertain about the future of the virus and the economy. |
| Open Table | Restaurant are still operating at 49% below compared to the same time last year as on Nov. 10. Restaurants in New York and Illinois are 66% and 76% below, respectively. |
| Air traffic | Air Traffic stayed 75% below compared to same time last year, reflecting the impact of COVID-19 on the tourism sector in large. |
| Energy demand | Energy demand showed a fast recovery and is trending at the par pre-COVID-19 level, while the active rigs count remained quite low for the week ended Oct. 31, which reflects the lower crude oil price weighing on investment. |
| Raw steel capacity utilization | Capacity utilization continued its upward trend, coming in at 71% for the week ended Nov. 7, which was 8% below the 2019 level. |
| New business applications | Business applications increased by 28% year on year for the week ended Oct. 31, and growth remained elevated. |
| Home mortgage applications | Mortgage purchase applications have continued to move sideways since June after showing a V-shaped recovery as mortgage rates remained historically low. But for the past two weeks, mortgage application fell to its lowest level since the end of May. |
| Lumber futures | Lumber prices rose again in the past week after falling to a two-month low in October. It remained well above pre-COVID-19 levels. |
| Baltic Exchange Dry Index | The cost of transporting continued to fall, coming in at $1,141 (the lowest since June 16) . In the past eight days, the cost dropped by $142. The index now fell below the 2019 average. |
| Industrial Metal Price Index | Industrial metal prices continued to move upwards and have been above the 2019 average for more than two months. |
| Rail traffic | Rail traffic continued to trend higher. It increased by 1.6% year over year for the week ended Nov. 7 and remained above pre-COVID-19 levels. |
| Jobless claims | Initial jobless claims fell to nearly 700,000 for the week ended Nov. 7 but remained more than two times the 2019 average. Continued claims fell as well. |
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The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.
| U.S. Chief Economist: | Beth Ann Bovino, New York + 1 (212) 438 1652; bethann.bovino@spglobal.com |
| U.S. Senior Economist: | Satyam Panday, New York + 1 (212) 438 6009; satyam.panday@spglobal.com |
| Research Contributors: | Debabrata Das, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai |
| Arun Sudi, CRISIL Global Analytical Center, an S&P affiliate, Mumbai | |
| Shruti Galwankar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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