Retail sales in May were 6 percent lower than last May, which is not a good number, per se, but it’s much improved from the 20 percent year-over-year drop in April. And it’s another data point showing that the economy is rapidly re-normalizing.
The retail sales report comes after the surprise jobs report showing 2.5 million jobs added in May — and just before a report showing rapidly rising sentiment among homebuilders. (Another sign Americans feel good about spending on homes: retail spending at building supply and garden stores was actually 16 percent higher this May than last May.) If epidemiological conditions materially worsen — and they have become more worrying in some states — that could knock both household confidence and economic activity off track. But so far, the stock market enthusiasm that seemed puzzling in May is increasingly getting backed up by data from the real economy. Consumers are coming back.
That consumer activity is recovering quickly now does not mean we will have a full v-shaped recovery, with the economy getting back within a year from now to where we would have expected it to be a year ago. The most resilient parts of the economy will bounce back first and fastest; many businesses’ COVID-driven closures will turn out to be permanent, and many individuals will face persistent economic hardship due to the crisis and as they figure out what to do next. But there are three key factors driving the fast-so-far recovery in consumer activity: a lot of businesses have been able to reopen and offer their goods and services for sale again; a substantial fraction of people who lost their jobs have gone back to work; and government benefits have sufficiently supported the financial condition of most American households such that people have money and do not feel afraid to spend it.
The CARES Act, which authorized over $2 trillion in aid to support the economy, most of which has been, or will be, distributed over a period of just a few months from March to July, is a seriously under-heralded piece of legislation. (I am still irritated about all the “They think a $1,200 check is enough to live on for five months?” takes that were published in March.) Four-figure checks for most American adults — plus $500 for most of their minor children — were a key component of the CARES Act, but only accounted for about an eighth of the law’s cost. Provisions in the law to enhance basic unemployment benefits by $600 per week and extend unemployment benefits to otherwise-ineligible workers like independent contractors were the most important elements that limited the extent to which an epidemiological disaster had to turn into a household finances disaster. The PPP program has also helped keep some workers on payrolls and some businesses out of bankruptcy. And lending programs established under the law, in conjunction with pre-existing Federal Reserve programs to stabilize financial markets, have helped to ensure that businesses of various sizes don’t go out of business for lack of access to credit. (This aspect of the policy response has been another subject of lazy takes — discussing business lending as though it were spending — but I digress.)
While there have been ongoing issues with processing difficulties and delays in both the unemployment benefits and the PPP, the macro-level data make clear that the money allocated by the law is by and large getting out into the economy and into household financial accounts. In fact, mass distribution of these benefits, combined with reduced spending under lockdown conditions, caused Americans to set a record high personal savings rate in April. Given the sharply rising retail sales in May, I expect we’ll soon see the savings rate has gone down due to the welcome increase in consumer activity.
I think part of why it has not really set in — at least in the media conversation — that the CARES Act is working, is that people who think the CARES Act is working are wary of saying so too loudly, lest that encourage policymakers to declare victory on the economy and decline to extend key CARES Act provisions when they expire this summer.
Look — I, too, recognize the need for an extension of fiscal support for the economy past July 31, when the enhanced unemployment provisions are set to run out. So do Democrats in Congress, and so does the Trump administration. Last week, Treasury Secretary Steve Mnuchin expressed the view that an additional economic support package would be needed, including a provision on unemployment benefits. If the president doesn’t want to drag down the economy just as he heads toward re-election, he’ll have to strike some sort of bipartisan extension deal. And the shape of that aid package should take into account the fact that the economy has been rapidly recovering and may continue to do so — or not.
One recent proposal from the Aspen Institute would address this uncertainty by tying the future terms of economic support to economic conditions. For example, the proposal would provide substantial aid to state and local governments, and that aid’s amount and duration would be tied to economic conditions — if states are deprived of more economic activity for more time, they would get more aid, automatically. It would also extend enhanced unemployment benefits at up to $400 per week (on top of the regular benefit, which itself typically averages around $400 per week) in states where unemployment exceeds 15 percent, with the size of the enhanced benefit stepping down gradually until unemployment falls to 7 percent.
The fact that the CARES Act usually provides an unemployment benefit exceeding a worker’s prior wages wasn’t a problem when Republican senators complained about it this spring — when we wanted most people to stay home anyway and didn’t need to worry much about people choosing to collect benefits instead of working. It will, however, become more of a concern as labor market conditions get closer to normal. The risk of either cutting off the enhanced unemployment benefit too soon and slowing the economic recovery or extending it too long and causing dysfunction in the labor market can be avoided by tying the reduction of the benefit to actual improvement in labor market conditions. The same goes for the state and local government aid.
The last few months have been full of seriously unexpected economic events. The pandemic-driven economic crisis was itself unexpected, and the ongoing recovery from the crisis has been faster than either economic forecasters or market participants (as measured by stock prices at the depths of the crisis in mid-March) had expected. It is possible that we will have better- or worse-than-expected performance going forward. The first step to dealing with that is acknowledging unexpected information, like Tuesday’s retail sales report. The second step is devising responses that are flexible as things get better or worse.