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Next forum date: Monday 10 August 2020
Following positive readings in Chinese and European manufacturing surveys, the US ISM manufacturing index increased by 1.6 points to 54.2. The new orders sub-index rose by 5.1 points to 61.5, its highest reading since September 2018. We have previously pointed out the problem with diffusion surveys such as the PMIs and the ISM. Their reported levels are difficult to interpret, but there is little reason to doubt that increases are consistent with further improvement in underlying activity. That said, the experience of China suggests that manufacturing will outperform in the initial stages of recovery. Buying a fridge, for example, is much less susceptible to virus fears than many forms of services consumption.
The biggest threat to our expectation for a V-shaped recovery, defined as GDP returning to its 2019 Q4 level by the middle of next year, is the virus. On that front, there was both good and bad news. Starting with the bad, daily new cases appear to be rising throughout Europe following fairly comprehensive economic reopenings implemented over the past couple of months. Over the past month the average number of daily cases has increased by double-digit rates or much more in many large economies. The WHO has pinned some of the blame on youngsters, who presumably are less fearful of the virus and have larger networks than older people. They are probably making more use of newfound freedoms in the wake of reopenings. The risk is that they then pass it on to more vulnerable members of society.
The increase in cases in many European countries during summer, when outdoor activities are much easier to accommodate, does not bode well for the months ahead. At the moment, cases, and their rates of growth, remain well below where they were in spring, and authorities have responded with targeted lockdowns of affected areas, both in Spain and in the UK. In Leicester, these have shown signs of working. But the need for them so soon after national lockdowns were eased is a concern. It is not clear why European systems to test, trace, and isolate so far appear to be much less effective in containing the virus than Korea’s, despite having had much more time to prepare. It cannot be ruled out that Korea’s more intrusive methods including enforced quarantine and access to spending data to track movement offer a competitive edge. More broadly, it raises questions about the feasibility of the vaunted goal of widespread reopening while containing the virus. Difficult choices may lie ahead.
There are few countries that have been able to conquer COVID-19 and keep cases extremely low, with previous success stories such as Australia and Israel back in partial or full lockdown. The better news is that there are also few that have suffered indefinite large outbreaks either. The number of new cases each day stateside has continued to ease, with populous states that suffered large outbreaks recently leading the decline (Arizona, California, Florida and Texas account for 29.6% of the US population). Hospitalisations and positivity rates have also dropped, suggesting that the improvement is real and not related to a lower number of tests. Friday’s employment report will shed light on how the rise in cases during July affected the recovery. Our own forecast is for a 2.5 million increase in payrolls, however, there is significant uncertainty around this number. Today’s ADP report showed employment growth almost flatlining in July. It cannot be ruled out that employment actually declined last month. High-frequency data suggest spending was broadly stable on the month. Against that backdrop, dither and delay in Washington on further fiscal support appears foolhardy and offers a possible path from V to U or L.
There are many ideas about how the pandemic will affect us over the long term. One of the most common theories is that large cities will be among the biggest losers. Looking beyond any increased health risk related to COVID-19, it seems reasonable to expect many will enjoy more flexible working patterns than before, including the option for increased working from home. That may be enough to persuade some city dwellers to move further afield, knowing that longer commutes may not be a daily requirement. There are signs of that from US rental prices. Data from Zumper show that nine out of ten of the most expensive US cities to rent a one-bedroom apartment have experienced declines in rental prices. However, it is still too early to tell whether this reflects cyclical or structural factors. Moreover, to the extent that any declines are permanent, large cities may actually increase their appeal once more, particularly for the young.
Finally, one of the benefits of living in large cities is easy access to a wide range of dining options. The UK government has increased the appeal this August by covering 50% of the cost of food and non-alcoholic beverages (up to £10 per person) in participating venues each Monday to Wednesday. The move appears to have boosted demand, which had been recovering quite strongly already, with figures from OpenTable showing a large spike in UK restaurant activity on the first day of the scheme — into positive year-on-year territory. Without commuters or tourists, London remained a laggard. Demand in the capital has not been weak across the board. The steakhouse Hawksmoor reported 5000 table reservations in six hours after announcing a £20 steak and chips deal (£10 under the scheme). I managed to bag a Monday reservation on 31 August, which comes with the additional benefit of a £5 corkage fee on any sized bottle of wine. Putting to one side the equity in the taxpayer subsidising my steak and malbec habit during a global recession, there remains, as elsewhere, a health versus wealth trade-off. International evidence points to indoor eating and drinking venues being important vectors of transmission for the virus. Encouraging more people into restaurants Monday to Wednesday may offer some short-term support to the ailing hospitality industry. But if it leads to a rapid increase in cases, August’s recovery could end up being a pyrrhic victory.
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