July 09, 2021 | 13:39
The Recovery in Real Time
The Recovery in Real Time
Given the diverse forces buffeting the U.S. and Canadian economies, a careful read of the very latest indicators is required to measure the recovery’s pulse. The U.S. is coming off a sugar high from two rounds of rebate payments but has also ended most COVID-19 restrictions. Real GDP growth likely peaked near 10% in Q2 and the speed of the descent from this mountain will be eyed closely by investors and the Fed. While the latest round of restrictions has slowed Canada’s recovery, it's set to spring back with the reopenings and as vaccinated consumers make up for lost time.
Here is a snapshot of what some of the timeliest releases indicate:
U.S. consumers are coming down to the stratosphere: The Chicago Fed’s new weekly retail sales index (derived from card transactions, business revenue, mobility data, and consumer confidence) flags a slight gain in the Census Bureau’s June retail sales (Chart 1). This, coupled with a further reversal in unit auto sales from April’s 15-year high, means that consumers ended the quarter back on their heels. But note that real consumer spending still likely rose 10% in Q2, so the descent is from Everest-like levels. We’ll eye this index in July when two opposing forces will buffet shoppers: the arrival of monthly expanded child tax credit payments for millions of households, and the end of expanded unemployment insurance benefits for millions of persons in more than half of the states. For the second half of the year, the former will more than offset the latter, providing a tailwind for shoppers.
Don’t write off urban housing markets: A rapid decline in San Francisco’s resale housing inventory testifies to the durability of the current housing boom. The city was hit hard by the pandemic as teleworkers fled to cheaper locales, but it's now seeing an acceleration in home prices, with the Case-Shiller measuring 15.1% y/y. Across the nation, tight inventories mean buyers won’t see much relief for some time.
King of the road: U.S. gas station spending has normalized and driver mobility on both sides of the border has actually surpassed pre-virus levels (Chart 2). Although many workers have yet to return to the office, more are choosing to drive to work rather than take public transportation, while many hybrid-teleworkers are commuting from farther away. Moreover, tourists are taking more road trips in lieu of traveling abroad. It will be interesting to see whether these trends persist when the pandemic passes.
Hotels coming back: All those extra road trips by tourists have been a salve for the struggling hotel industry, as business travel remains MIA, notably in Canada. Spending at U.S. hotels is quickly nearing normal rates, now just 15% below pre-virus levels versus about 50% at the start of the year (Chart 3).
U.S. airlines take flight: Domestic tourists have also taken to the skies in a big way in the U.S., with passenger volumes at 78% of 2019 levels in late June (Chart 4). While Canadian throughput remains grounded at just north of 20%, it is starting to leave the tarmac.
Back on the menu: The number of seated diners is close to normal in the U.S. (and well above in some states), while most Canadian cities have returned to the highs reached before the latest round of closures though still about 30% below 2019 levels (Chart 5). Edmonton was one of the first Canadian cities returning to normal, and the rest of the province won't be far behind with all restrictions lifted on Canada Day. The rapid upturn in dining testifies to strong pent-up demand for deferred services. The pandemic likely didn’t radically change our eating habits, though some people may continue to practice their newfound culinary skills.
Reopen and they will come: Despite lagging in Ontario, retail and recreational mobility in Canada is rising strongly and approaching U.S. levels, affirming that the economy can quickly bounce back if allowed to.
Workers really, really wanted: Available job positions in the U.S., Canada and many other countries far exceed pre-pandemic levels and continue to rise fast, hinting at worsening labour shortages (Chart 6). Indeed.com job postings are 34% above pre-pandemic levels in the U.S., with Canada close behind at 30%. Growing unfilled positions, notably in labour-intensive industries such as restaurants and entertainment, pose a risk to both the inflation and economic outlooks. In particular, many former workers in leisure and hospitality have found work in other industries, making it harder for these businesses to meet a flood of pent-up demand.
So, adding all these factors up, one can conclude that U.S. growth may have peaked but it’s still growing solidly, while Canada’s lagging recovery is poised to regain ground in a big way. This conclusion is reinforced by the latest weekly GDP tracking data. After rising nearly 12% y/y in late April (boosted by base-year effects), the New York Fed’s Weekly Economic Index of ten indicators has moderated to 10% in late June. The OECD’s Weekly Tracker of Activity, which applies a machine learning algorithm to Google Trends data, suggests U.S. growth averaged 15% y/y in Q2, before fading to 9% at quarter-end (Chart 7). This means Q2 should mark the apex for U.S. growth this cycle, though Q3 is likely still on track for a brisk 8% annualized rate.
In Canada, the OECD tracker averaged 9% y/y in Q2, again, flattered by last year’s shutdowns. After sliding as new restrictions took hold, the index turned up to a 5% pace in late June as the reopening gathered steam. While our monitoring suggests GDP grew only moderately in Q2, the tracker suggests the restrictions didn’t derail the recovery and activity is now starting to lift off.
Bottom Line: The latest real-time data largely support our view that the U.S. economy is climbing down a high mountain but with lots of energy for the trek ahead. Canada is trailing but clearly ascending as it shakes off pandemic constraints and vaccinates much of its population.