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Better economic data, but rising infection rates increase near-term risks

July 24, 2020
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Monthly Review (Page 3)

The sharp rebound in economic data from the COVID-19 recession extended through June, although concerns are building as new infection and hospitalization rates are rising again. Job gains spiked for a second consecutive month in June with a total of 7.5 million hires over the past two months (although still dwarfed by the 20+ million in job losses during April). In response to the further reopening of state and local economies, retail spending jumped again as job growth, pent-up demand from the lockdown, and low interest rates stimulated consumer activity. The business sector showed expansion again, too, with a surge in production, new orders, and overall survey data. Still, the unemployment rate, despite a large drop, was very high at 11.1 percent for June while weekly jobless claims continued to surpass 1.3 million into July. Broad domestic equity markets have been relatively trendless over the past month, after a “V” shaped recovery from mid-March to early-June, as the spike in new infection rates has increased concerns about the pace of economic recovery. Long-term interest rates remain toward the bottom of their very low recent range, but have shown resistance to falling further.

Outlook (Page 4)

The surge in hiring and consumer spending coming out of the COVID-19 economic shutdown has lifted growth expectations for the third quarter, which should show a sharp bounce back from the second quarter’s projected record decline for real GDP. But the recent rise in the new virus infection rate, especially in some of the most populous Sunbelt states, threatens to diminish the positive momentum from May and June as several states have moderated their economic reopening. We expect that a combination of more appropriate consumer behavior, better therapeutics, and effective and widely available vaccines (at least in 2021) will allow the economic recovery to continue for some time. But there are clear risks surrounding each of these assumptions that could slow (or even temporarily reverse) the recovery. Our baseline assumptions include historically easy fiscal and monetary policy for at least the next couple of years, which will help to propel growth forward at above-trend rates (at least when virus concerns have subsided). This implies continued low interest rates and inflation for a while. But the economic hole that the economy fell into earlier this year is so deep that it will take several years for it to get back to what would be considered normal levels.

Go deeper with the full July dashboard linked below.