Capturing the pandemic’s weird real-world effects is reflected in how high above trend retail sales are, at 12.9%, versus how far below trend employment is, at -6.7%
Wouldn’t it be great to “return to normal” now that Covid appears to be receding in the U.S.?
To get back to the pre-pandemic way of life, however, will probably be anything but simple and straightforward in many cases, considering how off-kilter they are, currently.
To capture the economic weirdness in one chart, Horizon Investments compared the changes in retail sales and employment starting in January 2020 against their five-year, pre-Covid trend. If they were back on trend, their deviation would be 0% in the chart below. But that’s not what you find.
Retail sales are running 12.9% above the five-year, pre-pandemic trend as of May, boosted by spending on new and used cars and an uptick in dining out. Meanwhile, the level of employment is 6.7% below trend. The divergence is all the more extraordinary since one might assume that spending and employment would move in tandem.
Why are these two trends diverging, especially as the economy reopens this year?
The recent wave of spending may be explained by the multi-trillion dollar infusions of money into pandemic relief and unemployment insurance programs, the continued employment of white-collar workers and the successful distribution of effective vaccines. Horizon Investments believes that such an unusually strong pace of spending will be difficult to sustain, and people will balk at paying much higher prices (see our Market Notes report on the surge in spending on durable goods and our Big Number on Americans’ negative view of home buying). Indeed, May’s retail sales report shows nascent signs of a turn back toward its pre-pandemic trend for those very reasons.
As for employment, one labor market measure is back to pre-pandemic levels: the percentage of people who say jobs are plentiful. The splurging American consumer has prompted businesses of all sizes to put up `help wanted’ signs. In the latest U.S. job openings report from the Labor Department, a record 9.29 million openings were listed in April — that’s 2.6 million more job openings than in December 2019.
The question is whether people will apply for work. Horizon Investments is hopeful that as unemployment insurance checks shrink and starting wages rise, employment will show strong gains. But that evidence may not come for a while. The 25 U.S. states that announced they are rolling back the extra pandemic unemployment payments will take several weeks to implement changes. Horizon believes the timeline suggests the July employment report – slated to be released on August 6 – would be the earliest date for a hiring wave to be reflected in the data.
Horizon believes financial advisors should be prepared for a lengthy stretch of time of guiding clients through economic data that will likely be anything but “normal” amid numerous supply and demand mismatches. Developing financial plans focused on achieving goals and working with clients to stick to those plans, especially during times of uncertain headlines, can be an important part of seeking successful investment outcomes.
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This commentary is written by Horizon Investments’ asset management team. For additional commentary and media interviews, please reach out to Chief Investment Officer Scott Ladner at 704-919-3602 or email@example.com.
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