We are only part way back

Michael Rudd, CFA | President, CEO and Portfolio Manager

As the pandemic began to make its way across the globe and the recession started, many investors and policy makers put forth a “V shaped” recovery as a hopeful thesis. While this has apparently happened in the stock market, it appears that a different trend in the regular economy is developing. We have tracked a number of indicators in China, Europe and North America to get a sense of how the economy is recovering. China by far and away had the best economic recovery, bouncing back very quickly. Europe and North America are a different case. While Europe seems to be improving on a more consistent basis, North America is somewhat different. In particular, the US, while appearing to have reached a bottom (for the time being?) has come back partially with improvement slowing in recent months. Travel, office attendance, hotel reservations and restaurant traffic seem to be hovering at around 50-60% of what they were before the pandemic and consumer confidence has turned lower again this month (remember the consumer is 66% of US GDP).

  • As you can see from Figure 1, consumer confidence, while not as bad as the depths of the Great Financial Recession, has not bounced back from the bottom. We suspect that a substantial portion of this is related to unemployment. While the last few Jobs reports showed gains of 1m jobs per month, we have to remember that cumulatively 22.1m jobs were lost from February to April and we have only gained 10.6m back.
  • I found reference to the data in Figure 2 in a presentation put together by Doubleline Capital LP a US bond manager. It shows the gap between disposable income, which includes government assistance and then the same figure with international transfer receipts removed. You can see the two divergent points in 2009 and again in 2020 when the government step in with significant monetary stimulus. Prior to that, both were perfectly correlated. The space filled by the government because of lack of economic activity plays directly into a drop in consumer confidence. People know things have slowed.

“This means that” even with various parts of the economy opening up again, we will still have a long way to go from an economic perspective to return to where we were in January. While there is data that indicates some constrictive recovery, we also have to consider that behaviors will have changed and the fall-on-effects will be somewhat medium term in nature (our opinion).

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