MARY REICHARD, HOST: Coming up next on The World and Everything in It, the Monday Moneybeat.
NICK EICHER, HOST: Consumer spending overall for May saw a record jump, coming as it did on the heels in April of a record slump. This is the comprehensive spending number, not just retail sales. It’s all personal consumption expenditures—PCEs—and it includes what we spend on goods and services.
After dropping almost 14 percent in April—that first full month of lockdown—spending recovered more than 8 percent last month. It’s the biggest recovery on record, but makes up only about half the losses in April.
PCEs matter. They give us more than two-thirds of overall gross domestic product, so it is a bit of a preview of the GDP number we’ll see for the second quarter of the year, which ends tomorrow.
It’s time now to talk with David Bahnsen, financial analyst and advisor. David, good morning.
DAVID BAHNSEN, GUEST: Good morning, Nick. Good to be with you.
EICHER: I like to bring up these spending reports, especially the PCE figure, even though I do know business investment is the better barometer for the underlying strength of the economy. But did you find anything new here, anything interesting?
BAHNSEN: No. I don’t think that that particular number mid-month has a lot of update to it. It does seem to me in the weekly numbers that some of the things that were headed in the right direction have slowed down a bit. I don’t think that’s a big surprise in the sense that you would have expected a surge higher at the immediate part of the reopening. But I definitely think that this week, seeing that weekly jobless claims number, even though it came down a little bit week-over-week, it is still staying stubbornly high for new claims. And I think that the PCE number you refer to and where we’re trying to just get some feel for what consumer behavior is, is very tricky right now because the weekly data has so much volatility in it.
EICHER: Let’s go onto business investment, David, do you see any signs that that’s starting to fire up?
BAHNSEN: No, I don’t. And, yet, there’s a tiny increase in industrial production and ISM manufacturing that we see in June from the month of May. And yet that increase was not nearly at the same level from a percentage basis that you saw in some of the consumer data, such as spending and retail and mortgages and things of that nature. So, that’s not totally unexpected, but I think we’re going to have to see really into Q3. I think it’s going to be August, September before we start getting a feel for where businesses are. And if I’m being totally long-term oriented, which is actually what I mostly care about, I think it’s even into the end of the year and beginning of next year. Because this is what the economy was dependent on changing before COVID was whether or not after corporate tax reform and after the trade war businesses were finally coming out of the shell they were in throughout the post-financial crisis years. And now COVID has represented a whole other dimension in that complexity and there’s plenty of reason to be apprehensive that businesses are ready to go forward. They’re plenty capitalized. But do they have the long-term confidence and opportunity set to go generate a return on invested capital for the future? That’s the question.
EICHER: What about the reported increase in COVID cases? We’re seeing local officials tap the brakes on reopening around the country. That can’t be good news for the economy
BAHNSEN: Well, it really is going to depend on a couple of things, because I believe that we’re in a transition period right now where the economy is going to have to lead the way for the media in accepting the reality of COVID cases as a long-term reality.
But if—and this is a big if—but if we really do maintain what I’m seeing right now that’s held very steady for about a month, which is deaths are not increasing. Thank God. But cases are.
That has to then at some point message the media that we’re done just talking day after day after day about case growth, which is not in the real macro sense the significant data input. In other words, you have just a wider set of people in the country that get the case that are either asymptomatic or very low symptomatic and that it has a quick recovery rate and so forth.
I guess in a crass way what I’m saying is, is the economy on the verge of being prepared to live with coronavirus? I very much think that’s what’s going to happen. I very much think it’s necessary until the virus just simply starts to go away on its own or the vaccine everyone talks about, that kind of stuff. But right now with the case growth being the leading factor in the media every single day and yet mortalities and severities either not going higher or in a lot of cases declining, I really believe that then you get to the question of what’s going to be just the economic comfort level with co-existence.
EICHER: Do you have the sense, though, that the COVID stories are spooking the market? We had a big drop on Friday, and it took the market down overall for the week. Is it COVID or what do you think drove the market week?
BAHNSEN: Well, again, you’re talking about a market that was down like 700 or 800 points on the week, but it had three days that were up 600 points in aggregate and two days that were down 700. And so it’s really a lot more volatility. It’s more the market just being driven by uncertainty and headlines.
Look, I think there’s uncertainty around where we’re headed on our dynamic with China. I think that there’s going to be ongoing election uncertainty. And, in fact, that uncertainty in the election may go away. If the polls don’t tighten in August and September, there won’t even be uncertainty about the election because the market will just price in an outcome ahead of time. But I don’t expect that. I actually think that the election may tighten a bit more than the polls are indicating now.
But my point being that there’s more than just COVID that’s driving the markets. I still maintain that I can’t get any validation that in any other data point. Meaning, mortgages are still trading very rich. Corporate bonds are still trading very rich. Bank loans, high yield. So that, to me, is a real conflicting signal.
EICHER: David Bahnsen is a financial analyst and advisor. David, thank you very much.
BAHNSEN: Thank you for having me.