Economic data keep reinforcing the picture of an economy that has bounced meaningfully from its spring lows but is still fragile. The expiration of enhanced unemployment benefits at the end of July and the removal of other fiscal support measures by Congress, combined with the breakdown in relief talks, have people understandably concerned about a growth slump over the next month.
But underappreciated is the improvement in the pandemic situation in southern states that were hot spots just a month ago. This, along with consumers in those states normalizing their behavior again, is already showing up in the economic data and could be a potent offset to reduced fiscal support from the government in the weeks ahead.
It's easy to have missed the turnaround in southern hot spots because of how quickly the virus trajectory can change. As states began reopening their economies in late spring, Arizona was one of the earliest states to experience rapid virus growth. The seven-day average of cases in the state increased from around 500 per day at the beginning of June to a peak of 3,700 a day on July 7. Cases also spiked in other southern states such as Texas, Florida, and Georgia, with governors reversing some of their reopening measures and urging the public to wear masks as hospitals filled.
By mid-July cases had begun falling in Arizona and had either stopped growing or began falling in other southern states. Sensibly, health officials and the public at large took nothing for granted, with hospitals near their breaking points and concern that any reprieve could be temporary. But by now the improvement at least in Arizona is notable, with the seven-day average of cases down 75% from its peak. Other states have seen more modest improvement.
While a slower virus spread hasn’t swayed more cautious states in the Northeast from focusing on suppression efforts, observed behavior in southern states suggests it’s leading consumers to normalize their behavior again. Data from OpenTable in Arizona shows dining activity is increasing again and is back near its highs of early June. There's been a similar uptick over the past few weeks in Texas, Georgia, and Florida.
Air travel data from the TSA shows steady improvement as well after a stall in July. Between the July Fourth holiday and the end of July, air traffic was largely flat, as the spread of the virus and new quarantine measures in northeastern states put a damper on travel. But over the past three weeks U.S. passenger traffic is up by about 10% to a new pandemic-era high.
Also supporting the growth outlook is the fact that, even without fiscal support from the government, Americans’ personal saving rate remains elevated at 19% of disposable income, compared to a pre-Covid average of 7% to 8%. While this scenario wouldn't be great for household balance sheets, consumers might keep up their spending levels by drawing down savings.
This renewed economic momentum could be why we saw a sizable drop in initial jobless claims over the past two weeks after a stall in July. The economic pullback some expected to follow a second wave of the virus arguably happened. But in the aggregate it ended up being more of a stall, with housing and some other areas of the economy growing, while dining and some in-person activities pulled back a bit.
It's possible southern-state consumers are normalizing too quickly, leading to a resurgence of the virus over the next few weeks. It's also possible consumers are being more cautious now than they were in June, wearing masks and washing their hands more often. Along with the fact that 20% or more of the population in these states have already contracted the virus and thus may be immune, this could limit the scope of a third wave.
The conventional wisdom since March has been that the virus must be under control before the economy can normalize. We've seen evidence of that throughout the reopening process, as case spikes have led to reduced economic activity and vice versa.
But “under control” means different things to different people and different states. At the moment, the virus is more under control in southern states than it was a month ago, and economic activity in these states appears to be reaccelerating. That dynamic should help support the national economy over the next month, even if Congress can't get to a deal.
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