Wall Street thinks the economy will recover fast — here's why
Mere weeks after it became official that the U.S. was in another recession, Wall Street is betting that it's already over. Analysts point to a slew of better-than-expected economic signals, from jobs to mortgage applications, to make the case that the recovery has begun, sending stock market indexes like the tech-heavy Nasdaq composite to new heights.
"Feeling oh so good…for now," Goldman Sachs economists wrote in a recent report. "Economic data continue to point to a faster and stronger initial recovery."
Here's why the economy may already be finding traction — and what Wall Street may be ignoring in all the enthusiasm.
People are spending
The U.S. economy relies heavily on consumers spending their money, and in May and June, Americans spent plenty, on everything from food to mortgages.
Retail spending in May surged a record 18% from its ultra-low April level as consumers opened their wallets. Mortgage applications for new home purchases recently hit an 11-year high, indicating record-low interest rates are making Americans more eager to buy homes. And sentiment among homebuilders, which plunged in March and April, had its biggest ever jump in June.
"Record-low mortgage rates, the onset of spring and improving sentiment are spurring a burst of activity in the housing market. For the most part, economic indicators are showing more strength than expected, confirming that the worst of the Covid-19 recession is behind us," Bob Schwartz, senior economist at Oxford Economics, said in a note.
What's more, the data show consumers have the money to continue spending. Despite the massive job losses in recent months, disposable personal income in April jumped nearly 13% — the highest increase on record.
"Household spending has benefited from federal stimulus payments ("economic impact payments") and been reinforced by the return to work for some employees," noted IHS Markit.
Business looking up
The important manufacturing sector is also showing signs of a rebound, with industrial production recently posting its first increase in nearly half a year. The Morgan Stanley Business Conditions Index has hit its highest level since 2009, with three-quarters of analysts saying business conditions are improving. The index hit 87 in June. (A reading over 50 generally indicates expansion.) And the improvement was broad-based.
"[T]he recent gain in the index reflects improvements in activity from very low levels, but that improvement is broadening out," Morgan Stanley analysts wrote.
A big assumption
To be sure, Wall Street's rosy prognosis rests on certain assumptions that may turn out to be wrong. The biggest: That the economically devastating business shutdowns of March and April won't be repeated — even if the coronavirus continues to surge, as it is now in many southern and western states..
"[A]ny governor's reaction to a substantial second wave will likely be much narrower, more targeted and with more exemptions," Seth Carpenter, chief U.S. economist at UBS, said in a report.
Expectations for a swift recovery requires faith that businesses will stay open and people will keep spending even if coronavirus cases surge. Early indications suggest that may not be the case in states with rapidly climbing case numbers. Some restaurants in Arizona, Florida and Texas, all of which reported record-high daily coronavirus cases this past weekend, have had to temporarily shut their doors again after workers tested positive for the virus.
The other big question mark? Jobs. Even if hiring around the U.S. maintains its pace from May, when employers added 2.5 million jobs, it would take the U.S. nine months to reach pre-pandemic employment levels — an outcome far better than many economists predicted.
Yet some experts say the surprise burst of job-creation and spending last month was fueled largely by the emergency aid the government has pumped into the economy, and they warn the momentum could stall without another massive dose of stimulus.
"One consideration is if the first wave of rehiring was easier because businesses were allowed to re-open and people had stimulus checks in their pocket," UBS' Carpenter wrote. "Keeping that rehiring going will be key to the expansion. And keeping it going relies on continued strong spending."
That spending, many analysts say, may need to come from Congress. Several key deadlines are approaching. Some small businesses are running out of Paycheck Protection Program loan funds, while expanded unemployment benefits are slated to end in five weeks. And most states around the country start a new fiscal year on July 1, with many of them facing corona-sized holes in their budgets and the prospect of major job cuts.
A full recovery, according to Goldman Sachs, depends on Congress approving another round of funding — including more federal stimulus checks, extended unemployment benefits and money for states and local governments.
Without such action, "disposable income would likely fall sharply," and spending and hiring with it, Goldman wrote.
The takeaway: While the worst of the recession is likely behind us, how quickly the economy recovers remains to be seen.