Is a global economic recovery still underway? What the latest numbers show

by Megan Roach, Russell Investments

On the latest edition of Market Week in Review, Senior Portfolio Manager Megan Roach and Research Analyst Laura Bardewyck discussed key takeaways from recent economic data releases. They also provided updates on the spread of the coronavirus, government relief programs and equity-market performance.

June surveys show improvement in manufacturing sector

Manufacturing data released the week of June 29 was broadly positive on a global scale, Roach said, noting that purchasing managers’ indices (PMIs) in roughly 10 different countries improved during June. “At the aggregate global level, the J.P.Morgan Global Manufacturing PMI rose to a reading of nearly 48—up from a level of roughly 42 in May,” she explained, adding that readings above 50 indicate expansionary conditions, while those below 50 indicate contractionary conditions. While global manufacturing has not yet reached a level of expansion, several individual countries experienced expansionary conditions in June, including China, France, the UK and Canada.

Within the U.S, the Institute for Supply Management (ISM)’s manufacturing index also climbed above 50 for the first time since before the coronavirus pandemic set in, Roach said, reaching 52.6%. On the employment side, the nation’s June jobs report exceeded economists’ expectations by adding 4.8 million nonfarm payrolls. In addition, the U.S. unemployment rate dropped to 11.1%, down from 13.3% in May. Importantly, nearly two-thirds of respondents reported their job losses as temporary, Roach noted.

Recently released data also showed a sharp rebound in U.S. home sales, she said, with sales of new homes rising 44% from April to May, per the National Association of Realtors. “While the volume of sales was down 5% from May 2019, the month-over-month increase likely indicates that the annual springtime boost in home-buying activity was delayed, rather than canceled, this year,” Roach explained. In addition, a measure of U.S. consumer confidence tracked by The Conference Board rose to a level of 98.1 in June, up from 85 in May, she said.

“All in all, the latest data shows that the economy is clearly improving. However, the economic health of the globe will likely remain heavily impacted by the uneven path of coronavirus containment measures and economic reopenings around the world,” Roach concluded.

As U.S. COVID-19 cases rise, will the economy slow?

Zooming in on the path of the coronavirus, Roach noted that the U.S. has seen an increase in COVID-19 cases and hospitalizations over the past few weeks—especially in states like Texas, Arizona, California and Florida. The resurgence of the virus has led to the reinstatement of some restrictions and closures, she noted.

Even in places where local governments haven’t reinstated restrictions, the overall uptick in infections will likely result in reduced economic activity, Roach noted. “As we saw over the spring, individuals tend to limit their own mobility when infection rates rise. The latest surge in cases may lead to a slowdown in consumer spending and a derailing in consumer confidence across parts of the U.S.,” she explained.

Germany temporarily lowers VAT rates

Shifting to government relief efforts to combat the economic damage inflicted by the virus, Roach stated that Germany recently approved a measure to cut its standard VAT (value-added tax) rate from 19% to 16%. The reduction took effect July 1 and will last through year-end, she said. Meanwhile, in the U.S., both the Senate and House of Representatives voted unanimously on June 30 to extend the Paycheck Protection Program—which provides loans to small businesses—through Aug. 8.

In addition, U.S. Federal Reserve Chair Jerome Powell testified before Congress on June 30, Roach said. In remarks before the House Financial Services Committee, Powell noted that the U.S. economy has reached a recovery phase faster than expected, but that the path forward is still extraordinarily uncertain. The Fed chair also reiterated that the U.S. central bank remains strongly committed to using its existing toolkit to ensure that the economic recovery continues, Roach said.

Strong Q2 performance for equity benchmarks

Despite the uptick in COVID-19 infections in parts of the world, equity markets rose nearly 4% on a global basis the week of June 29, Roach said. June 30 marked the end of the second quarter of 2020, which she characterized as a record-breaking positive rebound for equity markets, due both to the speed and magnitude of their recovery. For instance, the technology-heavy Nasdaq Composite Index rose 30% during the quarter—its best quarterly performance since late 2001—while the S&P 500® Index climbed nearly 20% in its strongest quarter since 1998. The Russell 2000® Index of small cap stocks also logged its best quarter since 1991, Roach stated, rising roughly 25%.

As for the road ahead for risky assets, Roach said that she and the team of Russell Investments strategists see less asymmetry in upside versus downside scenarios than a few months ago. However, the strategists remain positive on both the U.S. and global business cycles, as they expect the recovery phase to deliver healthy, non-inflationary growth over the medium-term, she concluded.