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by  Eric Lascelles May 19, 2020

In this week’s video, Eric Lascelles, Chief Economist of RBC Global Asset Management, shares his insights into economic developments related to COVID-19. Lascelles notes that he is seeing more positives than negatives lately in the data. There have been improvements related to infection rates, oil prices, and the stock market – but we are not out of the woods yet.

Watch time: 13 minutes 15 seconds

View transcript

Hello, and welcome to our latest weekly economic videocast. My name is Eric Lascelles. I’m the Chief Economist at RBC Global Asset Management.

When we talk about COVID-19—and that’s almost the only thing we get to talk about these days—there are some significant positives to share over the past week, both in terms of actual developments, and also, ways that our thinking has evolved. That’s not to say it’s a purely positive. I’ll share a few caveats toward the end. But again, I’m seeing more positives than negatives right now. And I should note, that’s been acknowledged in risk assets like the stock market, also in terms of a recent enthusiastic rebound.

When we start in the natural place, which is with COVID-19 itself, the global trend and the number of new daily cases still going roughly sideways. But I will say, major developed countries do seem to be increasingly taming this. It’s not to say that it’s gone altogether or that there aren’t risks of return, but nevertheless, when we look across many of the major markets, we are incrementally seeing fewer new daily cases in the likes of the U.S., Canada, and the UK. We have seen a profound decline in the number of new cases in Italy and many of the other major European powers. Even Sweden, which hasn’t engaged in the same extent of social distancing or quarantining, isn’t spiking or anything quite as severe as that. It’s in fact even coming down slightly.

And when we look at places in the U.S. that have opened earlier than others, the State of Georgia being a particular prominent example that we’ve paid close attention to, the number of new cases going roughly sideways, and so not down, alas, as it is in many other places. But nevertheless, sideways, not a bad situation, given the extent to which that economy is being reopened. And again, Georgia is our canary in the coalmine in many ways, and so far, that bird, I suppose, isn’t chirping right now, which is a good thing.

Moving from there into the economic landscape, one thing we’ve thought a lot about and really tried to get right is the extent to which economies fell during the worst of the quarantine. And so we’d like to think we’re past that. In fact, in a moment, we can even talk about recoveries. But let’s focus for the moment on the depth of the decline.

And so, we generally work with an assumption that the U.S. economy fell by as much as 22.5% from peak-to-trough, that many other developed countries fell by a little bit more than that even. And we still don’t have a perfect sense. We don’t have all of the data that we ultimately need to render a final verdict on that. But I can say, we are getting some tentative evidence it might not be as bad as initially feared.

And so, for instance, initially, we had access to real-time data, the sort of data that really didn’t even exist in many cases as of a few months ago when we were seeing surveys, custom-made surveys indicating that U.S. businesses were reporting revenue down by 44%, reporting that hours worked of hourly workers were down by something like 60%, reporting that credit card and debit card usage in the U.S. was down by 30%-plus. And so we were getting huge declines.

In contract, though, we’re now beginning to get some of the harder economic data here. And so, for instance, the actual traditional numbers that take a while to come out, but nevertheless are the final verdict on the situation. And so, for instance, we can say that U.S. retail sales for the month of April representing the big decline, the worst of it—the month of April down 16%. And that’s a big number, but it’s not the 30-some percent that we were seeing out of credit card or debit card statistics.

And indeed, when we add on the decline that occurred in March, which you have to do to get the peak-to-trough effect from February through to April, we end up with a 23% drop, which again, is very significant, but isn’t quite the 25 to 30% drop we’ve been budgeting for consumer activity. And so, arguably, a little bit less profound drop on that side.

And then on the business side, we see industrial production in the U.S. now out officially for the month of April, down 11% in April, but also down in March, and so down cumulatively 15% since February. And so very large, again, and speaking to the enormity of the economic impact, but not quite the 20 to 25% decline that we’ve been assuming.

Now none of this is the final word. Retail sales plus industrial production doesn’t equal GDP. For that matter, if we really care about peak-to-trough declines, the true trough was probably always hiding somewhere in April, and towards the end of April, there was likely something of a rebound. And so we’re not actually—we’ll never get to fully, directly observe the peak-to-trough decline, perhaps. And so there are caveats, I suppose, that are appropriate, but it would seem that there is a risk perhaps that the hit hasn’t been quite as big as we had initially assumed, so there’s a bit of an upside risk to our forecast, which I’m very happy to say.

Let me also note that when we look at U.S. job numbers, there’s no big new report here. We have talked about that in prior weeks’ videos. But nevertheless, when we look at jobless claims in the U.S., one thing that we were struggling to reconcile was the extent to which the number of Americans who had applied for jobless claims or claimed those benefits was 36 million people. And yet, officially only 21 million people have lost their jobs according to the traditional statistics through March and April. So how to reconcile where are these other 15 million people who aren’t getting picked up.

And part of the answer is, they’ll get picked up in the May data. The April job losses didn’t pick up the last few weeks of the month. But the bigger answer, and the reason we don’t think there’s 15 million job losses coming when the May numbers do eventually roll around, is that apparently, a significant number of people were applying more than once. And so to the extent that systems were overloaded, people weren’t getting their responses or their cheques as quickly as they would have liked, people were applying multiple times. And so, the 36 million isn’t actually 36 million discrete people, and so, conceivably, not quite as big a hit on the labour market side, as of some of those quasi real-time numbers would have suggested.

So overall, peak-to-trough decline that’s enormous by any standard, and lots of human tragedies, and indeed, broader economic tragedies within here, but maybe not quite as big as we’ve been assuming. And we’re working through some of the implications of that in the coming weeks.

Let’s talk now about the extent of the economic recovery that we are beginning to observe. And so, to start with, why is there a recovery taking hold. And we can say, we see several things happening here. For instance, we see that government rules are beginning to be eased, and stores are being allowed to open incrementally, and in some cases, more than incrementally. In fact, in some places, restaurants are now allowed to reopen, and that was long expected to be among the last sectors allowed to restart. And so some of this is happening in fast forward relative to expectations.

But let’s also acknowledge other things that have allowed economies to begin reopening. There is less panic right now. And so, initially, savings rates were very, very high indeed, and those savings rates plausibly coming down a little bit as people feel more willing to spend. They’re not worried about civil unrest being significant, not worried about civil society breaking down, and so we’re seeing less panic equal a little bit of a normalization of activity.

Let’s acknowledge also adjustments are taking place. And so, for instance, we see stores figuring out how to operate while maintaining social distancing. We see people figuring out how to spend money without even going into stores. And so, for instance, before COVID-19 came along, around 15% of credit card usage was on online activities, online spending. That’s now increased to 30%, so it’s been effectively a doubling, you might say, of spending online has occurred. And so people finding a way to get the things they need while constrained by physical distancing.

And then, lastly, in terms of why we’d observe the start of a recovery, even in many cases, before governments changed the rules all that profoundly, was that government cheques were also starting to arrive. And so it was all fine and good to say, don’t worry, a few thousand dollars will be coming from the government. But in the end, until that money actually lands in people’s bank accounts, of course, they’re not able to spend it, and they’re probably a little uncertain as to whether they’re truly eligible and truly receiving this money. And so, that, we think also has helped to explain some part of the rebound.

And we can see evidence of it now in the data. And so again, a lot of—in fact, almost all of what we’re relying on is that unconventional, real-time data. We just don’t have information from May yet in any traditional sense. But we can say, for instance, some measures of U.S. credit card and debit card usage, they were down as much as 36% in late March. They’re now down only 9% in early May. That is a three-quarters recovery, and so that’s about as optimistic as it gets, if I’m being honest. We see lots of things that say there hasn’t been a three-quarters recovery elsewhere, but I can’t deny that measure seemingly exists. And in fact, we’ve seen published data in Canada that argues about half of the decline in credit and debit card usage has since been recovered in Canada as well. And so, consumers are spending more money compared to the worst of this. Not like they were in February. Nevertheless, to a significantly greater extent.

We can also say, looking at hours worked, a survey at least of hours worked in the U.S., about a quarter of the decline in hours worked of hourly workers seems to have come back, so we’re seeing some incremental return there. It’s a little bit curious because jobless claims remain quite significant, and so it’s hard to reconcile, is there net job creation or just less job destruction happening in countries right now. I don’t know the answer to that, but it’s a debate that we weren’t having as of a week or two ago.

And we’ve even seen in places like Georgia and Texas—again, states that have been among the more enthusiastic to reopen—something like half of the decline in spending in restaurants in those states have since been recovered. And again, that was something we thought would take quite some time. So we are getting evidence of quite a significant recovery, at least in the short run, that is an economic positive.

Now let me talk, though, about the dangers associated with an enthusiastic economic rebound. And so those would be primarily that there isn’t obviously a lot of room to ease social distancing rules. We’ve done math that suggests, if this virus normally spreads at a very aggressive rate, which was seemingly the case in February before social distancing began, there is really a limit the extent to which social distancing rules could be eased before the virus, in theory, starts spreading again. And so we are still quite nervous about this. There’s a higher risk of a double dip from an economic standpoint or a double spike from a virus outbreak standpoint, but let me acknowledge, there is at least a fighting chance that that can be avoided. So we think it’s a very significant risk and it’s a rising one, as we see the recovery take hold here. But nevertheless, some things have changed. And so it’s not quite so simple as saying, we can remove only a bare handful of these social distancing measures.

And so keep in mind, some things have changed here. For one, even as people go back to stores and perhaps even to work, there are now social distancing measures in place. People wear masks, barriers have been built between workers, these sorts of things. People know to keep 2 metres or 6 feet apart from one another. And so that changes the equation to some extent, and that remains in place even as the economy attempts to revive.

Let’s keep in mind, there’s more testing going on now. In fact, exponentially more testing than there was, for instance, in February and early March. And that allows some ability to control the virus even as people begin a more normal approximation of their lives. The disease is better understood as well in terms of symptoms, in terms of treatment, for that matter, and so that argues you can do a little more than you might have in February or March. Medical capabilities are rising. We understand where the hotspots are, and so senior care facilities seem to be by far the biggest risk in many jurisdictions—80%-plus of the deaths are happening just there. And so, obviously, that’s not a place that can ease its rules at all and you can arguably control quite a large fraction of the overall problem.

Conversely, rural areas or places that weren’t adversely hit can afford to open more than others, and so that’s happening to some extent. And of course, businesses and offices are upgrading their facilities in general, and really creating an environment that can plausibly control or at least limit the spread of COVID-19.

And so, we’re left, again, quite nervous. The reopening does seem aggressive. Restaurants allowed to reopen here in a way that we didn’t think was likely, frankly, for several months, and so the risk of a double dip has gone up. But for the moment, we’re not seeing evidence of the number of new cases rising, even in places like Georgia that have been among the more enthusiastic. And so, we have to say, the risk is, again, that the economic hit isn’t quite as big as we’re budgeting, and that’s a positive thing, I think. And so to conclude, let me just say, this is really the video form of our long-form #MacroMemo, a weekly note that we put out, and so, I’ll just direct you to that weekly note if you’re at all interested in more detail in this sort of thing. And indeed, we also will tackle top topics such as assumptions about the trends of immigration going forward, the extent to which the money supply has spiked across much of the world, the latest on some of the vaccine pushes that are ongoing right now, and more.

And so, with that, I’ll say thank you very much for your time. I wish you very well with your investing. I hope you choose to tune in again next week. Thank you.

For more information, read this week's #MacroMemo.


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