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Retail-Sales Surge Support a V-Shaped Recovery

Retail-Sales Surge Support a V-Shaped Recovery

Michael Busler By Wednesday, 17 June 2020 03:07 PM EDT Current | Bio | Archive

Recently released figures indicate that retail sales in May increased by nearly 18%. That’s the biggest monthly gain ever. This number re-enforces the forecast that a V shaped recovery from the deep, yet short lived recession has already begun. However, many prominent economists disagree.

Federal Reserve Chair, Jerome Powell said that the economic road ahead remains long and uncertain. Powell notes that a total of 40 million workers have lost their jobs since February, although in May millions have returned to work.

Other economists, like Beth Ann Bovino, chief economist at S&P Global commented on the May retail sales number saying, “I would caution not to be fooled by this large gain. We still have a long way to go in repairing the economy.”

What will the recovery actually look like?

The consensus view among economists is that the recovery will be U shaped rather than V shaped. The U shape means that the economy will rebound slowly and likely takes many months before a sharp recovery begins. The V shape means the recovery has already begun and the economy will rebound quickly. Which scenario makes the most sense?

Economists look at actual data from the past and then use that to forecast the future. This is a scientific approach that is data driven. However, when forecasting the future, some assumptions must be made. Depending on those assumptions, the shape of the recovery will vary.

One such assumption is about consumer behavior. This is probably the most critical assumption. Consumer spending accounts for about 70% of all economic activity. Indeed, it is consumer spending that was the primary driver behind the three-year economic expansion from 2017 to 2019.

Most economists assume consumers will be at least somewhat reluctant to increase their spending. This view is supported by noting that the Covid19 virus is still here, although the total number of cases in the US is declining. As long as there are no therapeutics and no vaccines, consumers will exercise caution.

Additionally, in states like New York, New Jersey, Illinois, California, Pennsylvania and Michigan, the governors are re-opening their economies very slowly and won’t see their states fully operational until late July at the earliest. Some are saying the full re-opening may not occur until August or September.

These economists also note that many businesses have filed bankruptcy and many more are likely to file later this year. That will tend to reduce consumption.

On the other hand, those economists may be too pessimistic.

Another view, perhaps supported by the May retail sales numbers, is that consumers are ready, willing and very able to spend. After having been mostly sheltered from mid-March until early May, consumers are ready to leave their shelter and try to return to as close to a normal lifestyle as possible.

Prior to the lockdown, consumer spending looked very strong. In February it looked like this year could have seen the highest growth rate in decades. In 2000, the economy grew at a 4% annual rate. The economy hasn’t been close to that number since 2000. This year GDP could have hit a 4% growth rate. So, it looks like consumers were willing to spend.

President Trump working with Congress passed a number of stimulus bills which gave free money to virtually every adult who paid taxes in 2018 or 2019. A family of four received $3,400 whether they were financially impacted by the sheltering or not.

Unemployed Americans receive compensation from their state. Trump’s bill provided each worker with an additional $600 per week at least until the beginning of August. All of that extra income means consumers are able to spend.

The debate centers on whether consumers are ready to spend. The pessimists believe there will be some reluctance at least until a therapeutic and a vaccine are available. The May retail sales number contradicts that view. It appears that consumers are ready to spend as soon as their governors will allow them.

By mid-July most of the economy should be almost entirely re-opened. Consumers will continue to increase spending, even if some store are no longer in business. Consumers will find other stores. The increased income from the stimulus bills coupled with the very expansionary Monetary Policy (interest rates are near zero) mean the economy is set to take off.

Look for better jobs numbers and strong retail sales in the June data. Then hold on, while the economy really takes off.

Dr. Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.

© 2022 Newsmax Finance. All rights reserved.

Look for better jobs numbers and strong retail sales in the June data. Then hold on, while the economy really takes off.
retail, sales, economy, v shape, recovery
Wednesday, 17 June 2020 03:07 PM
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