The recovery is likely to move sideways for a month or so before restarting due to the implementation of the new COVID-19 budget package and a decline in new cases.
The past few weeks have shown signs that the recovery has stalled. Initial unemployment claims edged up, high-frequency indicators of retail sales are stalling, and the New York Fed Weekly Economic Index has moved south. The slowdown reflects the surge in COVID-19 cases since mid-June that has seen several states slow or partially reverse their re-openings.
Economic activity, however, is better correlated with mobility indicators than re-openings, as shown for instance by an IMF study of US states and EU countries. Mobility is, of course, a high-frequency proxy for rather than a causal driver of economic activity. Confidence likely drives both. A very large increase in savings reveals household loss of confidence since the pandemic (see Three Conditions For a Lasting Inflation Acceleration). A significant share of those savings have ended up in liquid assets such as bank deposits or money market funds.
I expect a recovery in confidence that will see households and businesses dip into their savings and re-energize the economic recovery. I believe the recovery in confidence will probably come from the implementation of a further COVID-19 relief budget package and from a decline in new COVID-19 cases, possibly to very low levels.
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