First-tier economic data for October shows U.S. industrial production, housing, and retail sales all continued to make gains. Housing starts and retail sales have eclipsed their pre-pandemic levels with a convincing V recovery, while industrial production continues to fall short but is making up ground. Estimates of overall economic activity--as measured by real GDP--point to growth in the first half of the fourth quarter.

GDP Makes Up Ground As COVID-19 Cases Spike

A closely followed running estimate of GDP growth (the quarter-over-quarter seasonally adjusted annual rate from the Atlanta Fed's GDPNow) reached 5.6% as of Nov. 18, reflecting a data dump from most of October. The first half of November also eked out growth despite spikes in COVID-19 cases across the nation and states and local governments starting to dial back reopening. The real-time activity tracker from the New York Fed (Weekly Economic Index, based on high-frequency data) likewise continued to signal the economy was making up ground midway through November (with the latest available data for Nov. 14).

That said, the prospect of increased restrictions on nonessential businesses in the coming weeks in major cities does not bode well for the rest of the year's consumer spending. It has become more likely that "circuit-breaker" lockdowns (those imposed for short spans of time) will be imposed in the coming weeks to stop hospitals from getting overwhelmed, even if policymakers in certain places remain opposed to mandated restrictions; the virus has a way of forcing your hand.

Because chances are increasing that people-facing sectors (retail, restaurants, bars, entertainment, transportation, etc.) will see stricter restrictions, the chances of GDP dropping on a monthly basis have increased, even as industrial and construction sectors may stay fully open. The U.S. economy is two-thirds driven by consumer spending, and if consumers take a precautionary stance and consumer-facing businesses operate below capacity, it won't take much for overall spending in the economy to contract.

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.

Industrial Production Maintains Its Climb

The industrial production climb has reversed 66% of the record two-month drop through March and April (see chart 1). By broad component, mining remains a laggard at 14% under its February level as oil prices, which remain below break-even for most U.S. shale producers, pose headwinds to growth. But manufacturing has picked up steam, now 5% under its February level. Sentiment data for regional manufacturers from the New York State and Philadelphia region for November yet again implied growth, and reinstated delivery of the Boeing Max 737 also means machines will be humming in the coming months.

Chart 1

Housing Starts Beat Expectations; Sentiment Posts Another Record High

Housing starts increased by 4.9% month over month to 1.53 million annualized in October from 1.46 million in September (see chart 2). This is a 64% increase from their April low and the fourth-highest level in the past 14 years. On a year-over-year basis, housing starts are now up 15%. Single-family starts boosted overall starts to new heights, increasing by 6.4% month over month to 1.18 million annualized, a 13.5-year high, while multifamily starts were more or less unchanged for the third consecutive month. In tandem, builders are also feeling particularly optimistic. The National Assn. of Home Builders Housing Market Index reached another all-time high in November (see chart 3).

Chart 2

Chart 3

Building permits were unchanged at 1.55 million annualized in October. As was the case with starts, the single-family component led overall permits. With permits running ahead of starts, the number of single-family housing units authorized but not yet started remains elevated, up 18% from a year ago. There is a sizable backlog of construction projects that could be started in the coming months. All of this bodes well for sustained solid growth in new residential construction and home sales. Existing home sales are also running high (6.85 million annualized, their highest since 2006), with the months' supply of existing home sales at 2.5 months--an all-time low.

We expect manufacturing and construction to be more resilient than services over the next few months, given the disproportionately adverse impact of COVID-19 on services. State and local governments are unlikely to shut down industrial and construction activities that can be done outside and with workers socially distanced.

Retail Sales Gains Moderate

Headline retail sales were up 0.3% in October, following a 1.6% increase in September--the smallest gain in this recovery (see chart 4). Retail sales have rebounded 34.1% between April and October after the 21.7% drop between February and April amid mandatory shutdowns, leaving sales now 4.9% above the February level. Overall retail sales have been above pre-pandemic levels since June.

Sales at housing-related retailers remained impressive in October, with sales at building material, garden equipment, and supply stores at an all-time high. This is consistent with the gains experienced in the housing sector. That said, there are signs that sales are weakening outside of internet sales. Sales excluding autos, gas, and building materials moderated to only a 0.1% gain for the month, following a gain of 1.2% in September. The weakening occurred despite overall sales getting a boost from Amazon's Prime Day sales (moved to October from July this year), as nonstore sales surged 3.1% in October.

Chart 4

Restaurants and bars sales declined in October, and we expect such sales, which remain well under normal levels, to continue to decline in the coming months as state and local governments increase restrictions on indoor dining to slow the spread of COVID-19, and as colder weather makes outdoor dining less appealing.

Household Debt Remains Low

Relative to the level of debt carried by households before the Great Recession, aggregate debt as a share of income was already low before the pandemic and became even smaller in the third quarter (see chart 5). Unprecedented income transfer from the federal government and lower overall spending compared with pre-pandemic levels have alleviated debt burdens even as the number of unemployed people has been elevated. Compared with before the Great Recession, aggregate debt service obligations remain moderate as well, with interest rates at all-time lows. The New York Fed reported that adjusted for inflation, the average U.S. household carried about 14% less debt in the third quarter of 2020 than in the first quarter of 2008, but only 9% more than at the lowest point, in the second quarter of 2013.

Chart 5

The CARES Act tried to support consumers through large fiscal transfers to households, such as stimulus payments and enhanced unemployment insurance; moratoriums on mortgage and student loan debt repayments; and a temporary pause of evictions for some renters. However, with further fiscal support to households in limbo for now, renters' relief already expired, and other moratoriums and extended unemployment benefits expiring at December-end, consumer spending and the overall financial health of the household sector (especially low- to middle-income) are at risk.

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