Monthly Markets Memo - May 22, 2020
by Dan Zalipski, CFA
It is likely that several aspects of our everyday life will be permanently changed in a post-pandemic world. Even so, Americans are eager to get back to something that resembles ‘normal’ as states begin to loosen restrictions and reopen their economies. With all the uncertainty surrounding how and to what degree our economy will return, one fact remains uncontested: our economic recovery rests squarely on the shoulders of the American Consumer.
The U.S. Gross Domestic Product, or GDP, is a measure of economic output and the most sited statistic to gauge economic strength. Seventy percent (70%) of the U.S. GDP is driven by consumer spending. With businesses closed and consumers forced to shelter-in-place across much of the country, it is no surprise we saw the first quarter’s GDP shrink 4.8%. However, with the pandemic hitting late in the first quarter, the numbers for the second quarter will be substantially worst. Some estimates show GDP shrinking by double-digits. Fortunately, with many states on the verge of reopening, the second quarter reports are expected to be the low point as local economies across the country come back to life.
Everyone is trying to figure out what this ‘new normal’ will look like. Analysts have also been looking to China, whose economy has largely reopened since March, for clues as to how the U.S. Economy will recover. Focusing on the consumer, the data is nothing to get excited about. A few months into reopening, spending across broad categories including restaurants, retail, and leisure all remain depressed. Consumer spending in the U.S. may be slow to return to pre-crisis levels should this same pattern play out.
Businesses are trying to strike a balance between safety and survival. They want their employees and customers to know that they take the health crisis seriously but are also searching for ways to remain operational and profitable. For example, restaurants and airlines will likely reduce capacity to comply with social distancing guidelines but will likely struggle to offset the lost revenue due to the empty seats. It is unlikely a restaurant can charge twice as much while seating half the tables and still expect to survive.
On the other hand, consumers surveyed in recent weeks reveal a population still very much concerned with the current health crisis. IBM’s Institute for Business Value surveyed over 25,000 adults last month to reveal shifts in personal behavior. The results suggest only 30% of consumers are ready to dine-in at a restaurant or bar when restrictions are lifted, and only 20% are interested in visiting shopping malls. There is also a concern of demographics as those older than 65 account for 20% of all consumer spending in the U.S. Being one of the more vulnerable populations to the virus suggests they may be more cautious to reengage economically.
The U.S. economic recovery relies on its large consumer base, one that has been forced to the sidelines for the past several months. As local economies reopen, businesses are facing an uphill battle to safely draw in consumers. These businesses are relying on pent-up demand from a consumer who has been unable to spend. At the same time, consumers are signaling they may not be as eager to venture out and open their pocketbooks. They say time heals all wounds, and in time we will gain more knowledge about the virus, effective treatments, and hopefully a proven vaccine that provides businesses and consumers a sense of safety and confidence.
"But I would just say this. In the long run, and even in the medium run, you wouldn't want to bet against the American economy. This economy will recover."
Federal Reserve Chairman Jerome Powell
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