V-shaped? W-shaped? L-shaped? There’s no historical reference for placing the U.S. economy in an artificially induced coma, and there’s been no shortage of letter-based predictions on what the recovery will look like and how fast it will arrive.
The consumer accounts for 70% of American GDP, and they will be what lead us out of our state-mandated economic house arrest. That means the health of the consumer should be a key data point to help us gauge what kind of rebound is in store.
There have been encouraging signs of consumer activity not being dominated by coronavirus fears, such as Shanghai Disneyland tickets selling out and Carnival Cruise bookings surging 600% for its reopening. But the most encouraging signs are just how much the consumer has been earning and has saved up during the lockdown.
When a recession hits, personal income usually takes a hit, too. But this is no ordinary recession, and it received no ordinary response from Washington to help alleviate its impact. Consistent with the bizarre nature of 2020, personal income is actually UP as unemployment hovers around 40 million and GDP potentially falls by some 30%. According to the U.S. Bureau of Economic Analysis, personal income rose by $1.97 trillion (10.5% increase) in April while disposable personal income was up $2.13 trillion (12.9% increase). These are staggering figures.
Many people have been earning more while unemployed than when they were working, something never before seen during a recession. Additionally, with the shutdown in place there hasn’t been anywhere to spend the money.
This has led to another stunning figure without precedent: a 33% savings rate. Coming out of a downturn, demand is typically subdued on account of people not having as much money; this is the exact opposite of our current situation as people come out of a recession with more money than they had before it hit.
It was expected the savings rate would have increased from the 8% it previously was, but a 4x uptick is massive. Pessimists would say this is more a result of uncertainty surrounding future earnings and this high savings rate will carry forward even when things reopen. But I argue that the consumer has been forced indoors while making more money than normal and has a wallet full of cash to spend, and optimism is long overdue.
What does this mean for stocks? We’re about 40% off the year’s lows, so collective market wisdom is pricing in a bout of growth that looks like it will manifest. We are a consumption economy with an oddly healthy consumer during a Great Depression-like event. This in conjunction with an overwhelmingly accommodative Fed means a strong economic rebound is in the works, and stocks should continue to rise. I’m wagering on a V-shaped recovery.