Economic Update – Week of August 16, 2020

  • Retail sales are up 1.2% in July but have tapered off since the economy reopened
  • Very little has changed with the Consumer Price Index, but this is mainly because there is a lack of demand for pretty much everything
  • Mortgage rates rose likely because of good news with the economy and coronavirus
  • Corporate bankruptcy are at 10 years high and the trend looks to keep increasing

Retail Sales. While retail sales rose 1.2% in July, they have since been relatively flat and could remain that way in the coming months without more stimulus or a relief package from the government.  The recent surge we saw in coronavirus slowed the momentum that wesaw and delayed the return of jobs for many workers and has even led to layoffs.  The uncertainty and loss of income for millions of Americans undercut retail sales and make it harder for our economy to recover from the deepest recession in modern American history.  Sales mainly rose at electronic stores such as best buy, but also rose at clothing stores, pharmacies, groceries and gas stations.  The slowing of retail sales could become problematic in the next few months if coronavirus continues to put a damper on the economy.  A slower recovery would likely cause companies to cut jobs and put even more stress on our fragile economy.

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Sales are % change month-over-month

Consumer Price Index.  The Consumer Price Index rose 0.6% in July for the second month in a row, after declining from March through May. Inflation as of this time has not been a problem during the coronavirus-induced recession that shrank demand in our economy.  Higher gas prices accounted for about a quarter of the increase in consumer inflation in July.  The cost of oil has recovered from multiyear lows earlier in 2020, though prices are still relatively low.  Prices for rent, medical care, new and used vehicles, auto insurance, passenger fares, apparel, wireless phones, and Internet service also rose.  Many companies lack the ability to raise prices any further because far fewer people are flying, going out to eat, booking hotel rooms, or buying clothes for the office, among other things.  The cost of food and recreation were among the few categories to show declines in prices.  Food prices fell 0.4% after three large increases in a row.  The government used trillions of dollars’ to aid our economy, but only because demand was collapsing.  Inflation has been famously described as “too much money chasing too few goods.”  But right now we have to worry less about deflation because there is not enough demand.

U.S. Bankruptcies. Bankruptcies (Chapter 7 & 11) are en route to a 10-year high with 424 companies filing as of August 9.  This includes both public and private companies with public debt.  The coronavirus has hit consumer companies, with more than 150 filings for bankruptcy, including Men’s Wearhouse parent Tailored Brands Inc., department store Lord & Taylor, and work-wear retailer Brooks Brothers.  After all, who needs to wear a suit and tie (or pants, for that matter) if you’re working from home?  Nearly 100 bankruptcies are in the energy and industrials sectors.  For example, oil-and-gas producer Chesapeake Energy Corp. and small-engine maker Briggs & Stratton are among the 35 companies that have filed with more than $1 billion in liabilities. 

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2020 is Year-to-Date (YTD) vs the others which are full year

 Mortgage rates moved higher this week, rising at the fastest pace in months. According to Freddie Mac, the most popular 30-Year fixed rate increased to 2.88% (but still below the 3.00% benchmark), the 15-Year fixed rate increased to 2.44%, and the 5/1 adjustable rate increased to 2.9%.  These strong increases ended a 6-week stretch in which rates trended consistently downward, a trajectory that reflects the pessimism brought upon by a surge in coronavirus cases and uncertain availability of Federal fiscal relief.  Mortgage rates usually rise in response to encouraging economic and pandemic news.  Last week stronger than expected inflation figures and encouraging developments regarding a COVID-19 vaccine likely caused the increase.

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