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Trend Signals and Recovery Expectations

July 24, 2020

We continue to track COVID-19 trends and leading indicator signals -- has our outlook for the recovery been impacted? Catch our newest TrendsTalk episode with ITR Director of Speaking Services Alex Chausovsky to hear our expectations for the next couple years.


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Transcript by Rev

Hello, everyone. Welcome to another edition of TrendsTalk with ITR Economics. my name is Alex Chausovsky, and today I wanted to provide you a quick update on all of the latest trends that we're tracking and how they pertain to our recovery expectations, really this belief that we're going to have a low point in the business cycle in the U.S. industrial economy in early 2021 and then a rising trend emerge over the remainder of next year and carry us through into 2022.

There are a couple of things that I wanted to talk about as it pertains to that outlook. The first thing I want to talk about are the COVID-19 trends that we're following on a daily basis, and then I want to give you a quick update on what we're seeing in the leading indicators of economic activity. We continue to track COVID daily as I mentioned. We're looking at the surging cases, we're looking at the strain that the healthcare system is facing both from a COVID-19 patient surge that we're seeing in hospitals and just overall ICU bed occupancy.

We are seeing the system obviously dealing with a major influx, but at this point we're not seeing any critical, overwhelming type of activity that causes the thing that the healthcare system is at or near a point of failure. What is most encouraging for us is that the deaths surrounding COVID-19, although they are rising, they're nowhere near the levels that we saw back in mid to late April when we were dealing with the first wave or the first surge in that most reliable of statistics that we use to track the coronavirus pandemic.

And what is also encouraging is that despite the surge in cases in places like California and Arizona and Texas and Florida, we're not really seeing the fatality rates climb. In fact, they're doing quite the opposite. For instance, in Texas, if you look at the fatality rate, when you compare the deaths to the number of cases back in mid-April, that stood at 3.8%. As of today, despite the rise that fatality rate is only at 1.2%. That's encouraging to us to say at the very least that the situation is not degenerating from that perspective and not getting worse.

At the end of the day what we really pay attention to from an economic perspective as it pertains to COVID-19 are the reopening processes in the various states. And clearly there have been some states that have taken some steps to reverse the process, but by and large right now, most of the states that have done so, including California, Texas, Florida, have all focused on public places of gathering, namely bars and restaurants. And we have not seen the type of wide scale closures and industry wide closures that we saw at the beginning of the pandemic in early March and April timeframe. That's very encouraging to us from an economic perspective.

The second thing I wanted to talk about are the economic fundamentals and specifically the leading indicators that we continue to pay attention to. We have a main dashboard of leading economic indicators that we track on a monthly basis. And I can tell you that as of the latest inputs, most of those have converted into rising trends. We have the JP Morgan Global PMI, which is in a rising trend. That represents about 80 to 85% of global manufacturing activity. That rising trend is holding through June, coming off of an April, 2020 low.

The U.S. leading indicator is also showing a rising turn off of an April, 2020 low. The Purchasing Managers' Index for the U.S. is also in a rising trend. And really we have a statistically significant number of our leading indicators that are now in these rising trends. And that's very encouraging to us from the perspective that it's going to be supportive of that recovery profile that we are expecting to emerge in the U.S. industrial economy, which is of course our benchmark for economic activity as we get into that early '20, '21 timeframe.

But there are some very critical signposts that we're really looking for, the stakes in the ground, if you will, that we are paying attention to and are monitoring to support our expectation that that rise will actually take hold. And this really highlights the need to pay attention to the data on a much more frequent basis than normally you would when you're in a typical business cycle environment.

What are those things in the ground? Well, there's about five of them. The first one is that we are looking for that shut down activity, both at the state and federal level. We don't want to see governors shut down their states again and we certainly don't want to see the federal government shut down the country or something along those lines that would hinder a potential recovery.

We continue to monitor the input of our leading indicators and we need at least five of them. That's the statistically significant number that we're paying attention to. As long as at least five of those leading indicators remain in those rising trends would show up as green in our dashboard, by the end of August we believe that the recovery profile will maintain its timing expectations relative to our outlook.

And finally, we continue to pay attention to those leading indicators, not only the monthly data but the weekly data that we're tracking now continues to be in rising trends. And that's very encouraging to us. But really from a signpost perspective, we need retail sales to continue to recover with the 3/12, which is the quarter over quarter growth rate, converting into phase A recovery in the second half of this year. Retail sales is a great benchmark and barometer for consumer spending and really reflects the more broader economy so if that is in recovery in the second half, that's very supportive of our outlook.

We also want to see single family housing starts. That's kind of the canary in a coal mine for the economy. Typically it leads by about 12 months and we need to see that 3/12 shift into phase A and maintain that recovery trend in the second half of the year as well to corroborate our expectations for that economic recovery in 2021. There's a lot of moving parts to all of this. We are certainly paying attention to all of them on your behalf and communicating the latest inputs that we're seeing from all of the data. I hope that you've enjoyed the session today, I hope it's given you a little bit of an optimistic outlook that's so far so good. We are seeing that recovery expectation maintain.

But certainly please do pay attention and follow us on all of the various social media platforms and with our Trends Report, because we're going to continue to keep you up to date month after month so that you can have the clearest path of the future, the clearest vision of how the economy is going to unfold, and you can make the best quality decisions with that information. Thank you guys very much for your time today. We really appreciate you joining us and I hope you join us again on the next edition of TrendsTalk with ITR. Have a great day.


Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.