A Supercharged Recovery?

Mathieu Savary, Global Strategist, BCA Research

The May Chicago Fed National Activity Index suggests a V-shape recovery is taking hold of the US. The National Activity Index surged from -17.89 to an all-time high of 2.61. A reading above zero is consistent with above-trend growth in the US, and in May, the US might have experienced one of its strongest sequential improvements on record.

The Chicago Fed National Activity Index is the only variable pointing toward a sharp pick-up in economic activity in Q3. The New York Fed Weekly Economic Index is also quickly gaining ground. It is nonetheless well below the Chicago Fed indicator because it makes a year-on-year comparison for GDP, not a sequential one. Additionally, even the hard-hit hospitality sector has begun to heal. The annual change in seated diners in US restaurants is recovering quickly and the hotel occupancy rates have bounced back from 9.6% to 50.4%. Both of these trends are accelerating.

The good news of a quick US recovery has a worrisome implication. The rapid bounce back is fueled by the extraordinary amount of monetary and fiscal stimulus injected by policymakers. It is also a consequence of the large amount of pent-up demand accumulated during the lockdown. However, pent-up demand is a finite source spending and it will be satiated. As a result, a strong recovery in Q3 and potentially Q4 will likely ebb in 2021, especially as the US fiscal thrust will become somewhat of a headwind next year.

Nonetheless, even if it slows down from its heady pace of the second half of 2020, growth will remain above trend in 2021 as the recovering labor market will continue to boost household confidence, which creates a downward pull on the household savings rate. Moreover, policy will remain easy, even if less so than this year. As a result, cyclical stocks, which benefit from above-trend growth, still hold a place in an equity portfolio.

BCA Research

Chart Of The Week: A Supercharged Recovery?