Thursday, May 14, 2020

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Slower declines are the new gains

When activity collapses in an economic crisis, before you can talk about a recovery you must first slow the rate of declines.

And so good news, relatively speaking, becomes characterized by a deceleration in the deterioration. You may recognize this from calculus class as a turn in the second derivative.

This is exactly what Bank of America’s credit and debit card activity has started to show.

“The daily data show meaningful improvement in spending into May, driven by the lower income population,” Bank of America economist Michelle Meyer wrote in a note to clients on Wednesday. “Total card spending is now running at a pace of -10% yoy over the 5-day period of May 3 - May 7, a big shift from the low of -36% yoy during the last 5 days of March.”

And when you’re looking into the economic abyss, a 10% drop in year-over-year spending turns into great news.

Late March was characterized by an economy that had been locked down in an effort to contain the spread of the coronavirus. Millions of Americans were filing for unemployment benefits during this period.

Meanwhile, we were only beginning to understand what kind of aid was coming in the form of fiscal stimulus. Amid all that uncertainty, it is understandable why spending collapsed.

So, what’s bolstering spending now? According to Meyer, it comes down to two big factors.

“There appear to be two critical reasons for the improvement in consumer spending: stimulus payments and phased reopening of the economy,“ Meyer said. “Focusing on retail sales ex-autos, spending is now actually increasing, running at a 1% yoy rate over the same 5-day period.”

The benefit of stimulus payments is simple. If your income goes to zero, then you can’t spend money. If the government hands you a check with no strings attached, you’ll probably start spending.

The boost from a phased reopening of the economy is an interesting one, because if consumers aren’t confident they won’t get sick, then they won’t go out. Unlike stimulus payments which are a known benefit to consumers, belief that the virus’ spread has indeed moderated could potentially upset these trends.

But early trends show that second derivative changes are likely to make activity look lively in states that loosen business restriction.

In Georgia, for instance, Meyer looked at a category where strangers come into close contact: beauty salons.

“Spending at beauty salons in GA averaged -46% yoy between May 1- 7th, up from the low of -96% in the beginning of April,” Meyer observed.