KEY DATA: Sales: 17.7%; Ex-Vehicles: +12.4%/ IP: +1.4%; Manufacturing: +3.8%/ NAHB: +21 points
IN A NUTSHELL: “The reopening is creating massive increases in activity and that should continue in June and maybe even in July.”
WHAT IT MEANS: The economy shut down in March and April, so when it started to reopen, it was expected that all the indicators would rebound sharply. Well, just as we had historic declines in the previous month, we now have historic increases. Retail sales soared in May, led by a rebound in vehicle purchases and demand for clothing. The clothing number is a clear example of the volatility of the data. In April, clothing purchases largely disappeared. The level was less than one-third the lowest on record, which dates back to 1992. May was up 188% from April’s historic low. That looks amazing, but it is still down 63% from the February 2020 number. So be cautious in thinking that happy days are here again. We still have a long way to go before we start seeing numbers anywhere near what we had been recording. Still, this was very good report. Every component of sales rose and it was good to see restaurant demand pick up. Of course, the food services component was still off nearly 40% over the year.
Industrial production was up solidly in May as well, mirroring the reopening of the economy. Manufacturing activity jumped, though much of that came from the reopening of vehicle assembly plants that had been idled. In April, almost no vehicles were built. In May, they were at a 2.7 million annualized pace. To put that in perspective, nearly eleven million vehicles were assembled in 2019. Still, the sector is ramping up and that is key. The paper products industry actually cut production for the fourth consecutive month. If you were wondering why the stores remain empty, that tells you everything. Why the sector hasn’t recovered is anyone’s guess.
Housing is coming back as well. The National Association of Home Builders’ index surged in early June, with all components up massively. The index is actually back to where it was in 2016 and is not that much below where it was a year ago. That is the comparison we have to look for: How far have we come back to more normal levels. The housing industry is not there yet, but certain components are getting there. The housing starts and sales numbers for May and June will be telling.
IMPLICATIONS: The economy is recovering, but when you start at historic lows and you reopen, that should not surprise anyone. The issue over the next two or three months will not be how big a gain we get, but how close we get to the end of 2019 levels. The strong retail and production numbers should lead to some improvement in second quarter forecasts. I don’t expect to see too many forty percent declines and estimates in the thirties may start to disappear. The latest Blue Chip consensus for the second quarter was -35.7%. I started at -22% two months ago and reduced that decline to -18% last week. I am sticking with it, though it is pretty close to the lowest decline in the forecast panels. Keep in mind, if we get something in the 20% to 25% range and the reopenings continue to accelerate, then the third quarter growth rate would be a lot lower than people currently think. The Blue Chip estimate is +17.2%. I am at +6%, so I am a true outlier. Still, the real issue is how long it takes to get back to where we were when the virus shut things down. Even the optimistic Blue Chip numbers, GDP doesn’t recover until near the end of 2021. I don’t have it fully recovering until spring 2022. What I am saying is that we knew the second quarter would be horrible and the third quarter would be great. But it is the fourth quarter and 2021 that really matter and it is hard to forecast those growth rates because we will not know the extent of the damage until the end of this year. So, enjoy the great data that we will be getting for the next two to three months, but also wait to see what things look like at the end of the year before getting too bulled up about 2021.