Are We Getting Back To Normal? Seems Like It

The investor optimism is quite elevated as witnessed by the all-time high levels of major indices. Investors are buying equities and selling long-dated Treasuries – the yields on 30-year US Treasury are at the highest level since mid-January 2020 after breaking above many resistance levels. Many areas of the economy are still depressed but prominent signs of improvements are showing up. Let’s take a look.

Retail Sales

Fig1: Retail Sales

Fig 2: Retail Sales – 3-Month Avg. Monthly Change

January’s Retails Sales report showed a big 5.3% month-over-month increase compared to the 1.1% increase that economists were expecting. The Core Retail Sales, excluding automobile sales, increased by 5.9% compared to 1.1% expectations. December’s Retails Sales numbers were revised down from -0.7% to -1.0% but the Core Retails Sales numbers were revised up from -1.4% to -0.2%.

The January retail numbers reflect the impact of the Covid-related $600 stimulus checks still, these numbers are quite good.

The total retails sales by dollar amount is higher than the pre-pandemic level and it has achieved its baseline trajectory (see Fig. 1). However, the 3-month month-over-month average rate of change has not (see Fig. 2). It has not reached the levels seen in 2012 after the Great Recession and also the bounce following the slowdown of 2015-2016. This means that there is still room for the retail sales numbers to improve as the recovery takes hold.

E-commerce sales have been a bright spot in these times (see Fig. 1) and have off-set a big portion of the decline in brick-&-mortar store sales.

Economy Continues to Improve

Fig 3: Employment, GDP, Income, and Industrial Production

The economic data following the pandemic-induced slump continues to improve, however, most indicators have not reached their pre-pandemic levels (see Fig. 3).

Immediately after the pandemic struck, Real Disposal income rose on account of the stimulus checks. Once those checks stopped coming they declined (top line in Fig. 3). Employment bounced up from low levels but it is flattening out (red line in Fig. 3). Industrial Production (teal line in Fig. 3) is the only economic indicator that is still showing signs of strengthening.

Wages and salaries data is showing promise as noted by Yardeni Research:

(1) Wages and salaries. Despite January’s disappointing payrolls report, our Earned Income Proxy (EIP) for wages and salaries in the private sector rose 1.1% m/m and 0.6% y/y, its first positive reading since last March. It had bottomed at -8.9% y/y last April (Fig. 1). Private-sector wages and salaries in personal income already rose to a record high during December and probably did so again in January according to our EIP!

Inflation is Still Benign

Fig 4. S&P Goldman Sachs Commodity Index

Fig 5: CPI and PCE

In the first week of 2021, the S&P Goldman Sachs Commodity Index ( $SPGSCI) broke above a downtrend line from the first week of October 2018 high. It is now at the highest level since late October 2018 (see Fig. 4).

The wages and salaries data is also improving as noted above. The hourly earnings for all increased by 5.4% in January, the payroll tax receipts have risen to a record high, and the income tax receipts have also rebounded (1).

Despite rising commodities, wages, and payroll tax receipts, the CPI and PCE are still not showing that inflation is heating up (see Fig. 5).

The Bottom Line

Last year, 2020, was a tough year for the global economy, which was ravaged by the Coronavirus. The governments and central banks around the globe took actions to mitigate ist damage and then implemented policies to prop up the economy. The medical community rose to the occasion and developed vaccines in record time thus improving morale and overall optimism. In the United States, it seems that these efforts have borne fruits and now the data is showing it. We may not be completely out of the woods yet as the vaccines have not been administered to the majority but there is no denying that getting back to normal soon is looking more and more plausible.

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