BUT

The initial euphoria over last week’s announcement that retail sales in May jumped a record 17.7%, and enthusiasm for the re-opening of the economies of several states are ebbing. The jump in sales concealed continuing weaknesses, and the re-openings are producing anticipated but nevertheless anxiety-producing increases in the incidence of COVID-19.

First, the May sales. The jump followed April’s record monthly drop of 14.7%, and did little for the hard-hit restaurants and bars that when fully operational give life to city streets and urban malls. Sales at those establishments, which provide jobs for many of the nation’s lowest-paid workers, remain 41% below February levels. It’s no fun trying to chat up, as our British friends put it, someone standing six feet away, down the bar, wearing a mask.

Still, Federal Reserve Board chairman Jay Powell told several congressional committees that the increase “bodes well”. Data on the housing market support his modestly upbeat statement. Homebuilding increased 4.3% in May. It remains 23.2% below last year, but not for lack of demand. Construction is constrained by builders’ decisions to hold off buying land and recalling skilled workers until the economy was re-opened. Those shortages are being remedied as builders’ confidence recovers: it recorded its highest ever monthly jump in June, passing the 50-mark that separates pessimism from optimism.

Most significant are the housing market’s forward-looking indicators. Mortgage applications (rates are a tad above 3%) rose last week for the ninth consecutive time to the highest level since January 2009, and were 21% higher than in mid-June last year. Permits to build new homes also rose in May, by 14.4%, as families flee cramped city apartments for suburban homes in what might prove an enduring trend. Smiling sellers are benefiting from bidding wars.

Home builders are not the only beneficiaries of consumers who still have jobs, but have been unable to spend their cash on vacations, dining out, tickets for theaters and sporting events, and camp for the kids. Leading items on the shopping lists of cash-rich consumers are backyard swimming pools and indoor Jacuzzis, furniture, household improvements and even boats (no prying eyes to detect a lack of social distancing).

The speed of the recovery will depend on whether cash-rich consumers will dine out, even if patio seating is unavailable. Or pick through racks of apparel, even those offered at 60% discounts. Or spend on a vacation trip when that might mean sitting snugly between two diseased passengers who have decided to remove their face masks.

Much will also depend on whether the government renews some of the measures that are pumping purchasing power into the economy, but are due to expire at the end of this month. Powell, disclaiming any role for the Fed in making fiscal policy, removes his tongue from his cheek when urging lawmakers to extend benefits and increase deficit spending to buoy demand. And over 100 economists published letters urging congress and the administration to renew and extend relief programs, the soaring deficit notwithstanding.

Politicians find that support comforting but unnecessary: in an election year they are unlikely suddenly to rediscover fiscal prudence and concern for future generations that will not be voting on November 3, and slam the cash-relief window in the faces of their constituents.

The economy’s course will also depend on developments on its supply side. Pent-up demand is already butting against an unresponsive supply of materials and workers. It’s one thing to be able to afford a great steak, it’s another to find one at a reasonable price as greater separation of workers in meat processing plants raises costs. Auto workers are not the only ones fearing the virus, and reluctant to return to reopened factories and shops. Add workers who are earning more staying at home, collecting topped-up unemployment benefits that exceed their pay, and you have a growth-restraining, inflation-inducing supply side.

Finally, there is the virus, a microscopic enemy that doctors have relied on to argue for bringing a mighty economy from historic boom to historic bust. There’s no free lunch. Life is a series of trade-offs. The piper will be paid. Choose one or all of these and you will have a pretty good description of the policy problem created by the resurgence of the virus.

New coronavirus infections hit record highs in six states last week. One source tells me that most of the new cases are of people in the 20-45 age bracket, the one containing many of the participants in the end-of-May Memorial Day weekend celebrations, eagerly bellied-up to re-opened, crowded bars, or participated in the recent demonstrations. At which a full-blooded libertarian in one of the affected Western or Southwestern states would snort that they exercised free choice in full knowledge of the risks, and lost their bets.

The decision to extend re-openings will vary from state-to-state, depending in good part on available capacity in the individual state’s intensive care units. That capacity varies widely from state to state. Texas has nearly 15,000 empty hospital beds available to accommodate any surge. Arizona, with 83% of ICU beds already occupied, faces the possibility of a shortage.

In several of the re-opening states the heightened impact of the disease leaves the incidence of cases and deaths at extraordinarily low levels, while unemployment remains in double digits. Governors, or at least the sensible ones, are ignoring predictions of disaster from model builders whose past forecasts have proved wildly wrong, and continue to attack the health and other ills associated with high unemployment. They were undoubtedly shaken in their resolve when Apple announced that it was temporarily re-closing all retail stores in Arizona (6 stores), Florida (2), North Carolina (2) and South Carolina (1), four states that are seeing the highest seven-day average of new coronavirus infections since the Wuhan virus emigrated to the United States.

Even governor Andrew Cuomo, while railing against partying New Yorkers who ignore social distancing guidelines, seems to realize that once people get a taste of the freedom to move about and enjoy human relationships, they are not likely to endure being locked up again. Other governors are calculating that for every new case created by re-opening their economies, thousands of workers will regain their jobs, thousands more small businessmen will avoid permanent loss of their life’s work, and the long-term damage to their economies will be reduced. There’s no free …. see above.

Meanwhile, President Trump says damn the spikes, full speed ahead with re-openings. He wants to present himself at packed campaign rallies as the man who brought prosperity before the virus hit, and is therefore best qualified to manage the recovery. Since no one will be forced to attend this peculiar form of entertainment, and all will have to sign a waiver promising not to sue the President or the event’s sponsors, the operative sentiment at the White House is chacun à son goût, although that’s probably not how Trump would put it. But he will not acknowledge that there will be a piper to be paid by attendees, and if there is the waivers will assure that he and his colleagues will not do the paying.

Democrats, on the other hand, would not be unhappy to see an economy once again locked down, voters miserable in their isolation, blaming the President for allowing the virus to reach epidemic proportions by ignoring early warning signals. This is not to accuse them of insensitivity to suffering, but rather to point out their sensitivity to the soon-to-arrive presidential and congressional elections. By shielding Joe Biden from news conferences and any contact with other-than his minders, they have enabled him to avoid gaffes and build up a substantial lead in the polls. The last thing they want is a relaxation of the rules that provide the excuse for his isolation in the basement of his Delaware home. Or the re-scheduling of his debates with Trump, who desperately wants to push them forward before early, mail-in voting begins on the theory that Biden’s gaffes will do more damage to his chances than Trump’s snarleyness will do to his.

Perhaps the best way to acknowledge that we still see the future of the economy and the result of upcoming elections only in a crystal ball, darkly, is to consider this. It takes eight months to build a house. For a buyer to commit to the purchase or a builder to start digging requires a degree of certainty about the near-term future. All our Fed chairman, whose actions to soften the economy’s fall are almost universally acclaimed, can promise is “significant uncertainty … about the timing and strength of the recovery.”