August 3, 2020 BARRON’S 31
THE ECONOMY
At its best, daily consumer spending in early Julywasdown4.3%
from January, Opportunity Insights data show. By the end of July,
daily spendingwas down 6.4% from January.
Ignore GDP–Here’s
What to Watch Instead
E
veryone knew it was
coming, but the antici-
pation made it no less
ugly: The U.S. econ-
omy shrank an annu-
alized 32.9% in the
second quarter from
the first. Investors should dismiss the
historic number—but not just because
the worst of the pandemic’s toll is over.
First, the annualized figures that
economists like to use are pointless at
a time like this. The headline number
effectively represents how much gross
domestic product would decline if the
lockdowns meant to contain Covid-19
continue across four quarters. They
won’t, so the real decline in output
was more like 9%. More importantly,
though, the speed and magnitude of
the pandemic’s impact has rendered
old news like quarterly GDP espe-
cially dated, as renewed surges in
infections prompt states and busi-
nesses to roll back reopenings.
The second-quarter GDP report
is important and meaningless at the
same time, says Gregory Daco, chief
U.S. economist at Oxford Economics.
It showed the depth of the hole out of
which the economy must climb, but it
says little about where we’re at or
where we’re headed.
When the coronavirus in mid-
March started to take hold of the U.S.
economy,Barron’swrote that neither
economists nor columnists could
predict the virus’ impact on growth.
That’s still as true as ever. No one
really knows where this recovery—
which started earlier and more
strongly than expected—is going.
Federal Reserve Chairman Jerome
Powell said as much Wednesday, re-
peatedly stressing that the U.S. is at
the mercy of the coronavirus.
“Anybody who claims to have a
firm handle on the economy’s path is
either delusional or lying,” says Joshua
Shapiro, chief U.S. economist at MFR
Securities. As such, higher-frequency
indicators take an unusual impor-
tance. This week,Barron’sdug into
several. They paint a picture not of a
building recovery, but of an economy
at risk of flatlining or declining after
regaining some ground.
Shapiro likes the New York Fed’s
Weekly Economic Index, a basket of
10 daily or weekly gauges—ranging
from initial jobless claims and federal
taxes withheld to fuel sales and rail-
road traffic—that is scaled to align
with real GDP growth. The latest
reading of about negative 7% shows
that the economy is springing up from
April lows, but still far from prepan-
demic levels (the WEI was at 2% at
the beginning of February).
Another source of more-real-time
data that investors might be keen to
watch is the Economic Tracker from
Opportunity Insights, part of Harvard
University. Consider the group’s daily
data on small businesses, responsible
for half of U.S. employment, half of
GDP, and 40% of total business
revenue. An improvement in small-
business revenue has started to fade,
now down 17% from January’s level, as
the number of small businesses that
are open is falling—a signal of busi-
ness failures as the crisis continues.
Daily consumer spending data
from Opportunity Insights similarly
show a decline from early July, before
Covid-19 cases started to surge in
places like Florida and Texas. At its
best, spending recovered, so that it
was down 4.3% from January’s read-
ing;now,itisdown6.4%.
What does this mean for investors?
The Fed continues to promise that it
will leave interest rates alone for a long
time, though it’s increasingly hard to
see how much ammunition it has left,
should conditions worsen. Powell has
been clear that Congress must provide
more fiscal aid—especially as the virus
lingers and recovery stalls, just when
enhanced unemployment benefits are
expiring—but even a partial extension
of the extra payments means a big hole
in income and spending versus the past
several months.
That all sets up an overly compla-
cent market that faces incredible un-
certainty, says Jeff Klingelhofer, co-
head of investments at Thornburg
Investment Management. Against a
backdrop of low rates and disinflation
in which volatility picks up and mar-
ket gains slow, he suggests that inves-
tors focus on assets that have low to
negative correlations with risk assets,
such as real estate and gold. While
gold has been one of the best-perform-
ing plays this year, with exchange-
traded funds including theSPDR
Gold Shares(ticker: GLD),iShares
Gold Trust(IAU), andAberdeen
Physical Gold Shares(SGOL) each
up 30%, many investment managers
expect more upside as rates remain
low and the dollar weakens. Klin-
gelhofer also says that investors should
look at international stocks or U.S.
companies with heavy international
exposure, and pick those with solid
cash flow. U.S.-listed European stocks,
such as German software company
SAP(SAP), may be worth a look.
Until the U.S. economy gets back to
previrus levels, which Klingelhofer
doesn’t think will happen before at
least mid-2021, it will remain largely a
fool’s errand to use conventional mea-
sures to predict where the economy is
going, and thus how markets should
react to it. The third-quarter GDP print
is bound to look deceptively strong—as
high as 25%, says Ian Shepherdson of
Pantheon Macroeconomic—given the
way it’s calculated. But employers don’t
care about base effects lifting quarterly
GDP growth. They care about the flow
of incremental demand, and on that
count, the picture is much less favor-
able, he says.
For now, high-frequency data are the
best way for investors to sift through
the noise and see what’s actually hap-
Sources: Federal Reserve Bank of New York; Opportunity Insights Note: seasonally adjusted and indexed to Jan. 4-31, 2020. pening. And it isn’t looking pretty.B
Higher-Frequency Gauges
The New York Fed’s Weekly Economic Index and Opportunity Insights’ daily data on small businesses paint a picture of an economy that has stalled
after an initial burst of post-lockdown activity. They’re among a set of economic indicators that should be more useful for divining the economy’s
growth trajectory than traditional measures.
Percent change, scaled to align with real GDP growth Values represent % change, calculated as a seven-day moving avg.
’19 ’20
-15
-10
-5
0
5% Change in Small Businesses That Are Open
Total Small Business Revenue
Jan. F M A M J J
-0.6
-0.4
-0.2
0.0
0.2%