Economic Data Continues to Exceed Tempered Expectations

Halfway through 2020, it’s safe to say that this year has defied all expectations.

As we looked forward to the New Year back in December, no one expected that by spring we’d endure the swiftest descent into a recession in history, driven, of course, by widespread efforts to contain a pandemic. And by all measures, the economic data crumbled. Jobless claims soared, production contracted, spending and sales tumbled — given the circumstances, we expected these awful numbers.   

But as we’ve transitioned into summer, expectations are once again off the mark — but in a good way. The Citigroup Economic Surprise Index measures how far economic data diverges from consensus projections (a positive reading implies data beat expectations), and last week that index soared to its highest level ever. In other words, incoming data was far better than anticipated. Expectations defied.

Now, it’s impossible to ignore the spike in cases around the U.S., and that could result in unexpected consequences. But, for now, let’s dig into the numbers to see what drove the surprise index so much higher last week.


Unemployment Fireworks Into Holiday Weekend: The economy regained 4.8 million jobs in June, driving the unemployment rate lower to 11.1 percent. The report was better than expected, but the unemployment rate still exceeds the high point reached during the Great Recession. Still, the data indicate a sharp reversal from the depths reached in April.

Leisure and hospitality, along with retailers, saw the most people return to work. Those are also the largest sectors in the economy and were hit hardest by shutdowns. Another note: While temporary layoffs are falling, the number of people who have permanently lost their job is growing. Overall the numbers are headed in the right direction. However, the coronavirus still has an outsized influence on the speed of the recovery and the pace at which Americans can return to work.   

Home Sales Surge: Pending home sales accelerated 44 percent in May — the largest one-month leap in the history of the data, going back to 2001. That handily beat expectations of a 19 percent month-to-month rise. For perspective, contract signings were still down 5.1 percent compared to May 2019, which is in part due to low levels of homes available for sale. However, that’s beginning to show signs of improvement in some markets where the economy is reopening. A rise in single-family home construction permits and historically low mortgage rates should also help bolster the market. 

Expansion Continues in China: The Caixin/Markit manufacturing Purchasing Manager’s Index, a private measure of smaller companies, reached 51.2, indicating the manufacturing sector is returning to growth (any read above 50 is expansionary). Domestic demand helped drive the index to its highest level in 6 months, while overseas demand remained sluggish. China’s official manufacturing PMI, which measures larger companies, reached 50.9 and inched into expansionary territory. On the services side, the Caixin/Markit PMI rose to 58.4 in June, which was a 10-year high.

The Same in the U.S.: The American manufacturing sector expanded for the first time since the pandemic swept through the country. The Institute for Supply Management said its manufacturing index climbed to 52.6, up from 43.1 in May. New orders, production and supplier deliveries all picked up sharply as businesses are seeing conditions normalize. 

“Looks like May was the bottom in terms of orders. June is stronger, and our order books are rebuilding,” said an executive in the machinery sector.

“We are seeing an increase in orders as the economy starts to get rolling again. Slow and steady, sales are increasing. So far, so good,” said another respondent in the primary metals industry.

Consumer Confidence Jumps: Consumers rounded out last week’s theme of exceeded expectations. The Conference Board Consumer Confidence Index rose to 98.1 in June, up from 85.9 in May. An improving employment picture and re-opening the economy helped. Keep in mind, cases started spiking later in the month, so a little caution is warranted.

“Faced with an uncertain and uneven path to recovery, and a potential COVID-19 resurgence, it’s too soon to say that consumers have turned the corner and are ready to begin spending at pre-pandemic levels,” said Lynn Franco, senior director at The Conference Board.


A Look at Vaccine Progress: This week, we’ll check in once again on where the world stands in its search for a coronavirus vaccine. Researchers have covered a lot of ground since we provided our last update a few weeks ago, with promising drug candidates marching ahead. A vaccine would not only be a triumph for humanity, but, as you’ll recall, we’ve said it’s the fourth and final benchmark on the road to a full economic recovery.

The Other ISM: This week we’ll get data from the ISM non-manufacturing index, another key report that could surprise to the upside. The services sector of the economy, by far, eclipses the manufacturing sector. A return to expansion would be another strong signal that a recovery is forging ahead, even though risks remain.

Buckle Up for Earnings Season: The slate of upcoming earnings reports could make for a volatile several weeks in the market (particularly in the back half of the month). That’s because investors are dealing with heavy cloud cover heading into earnings season as so many companies suspended guidance due to COVID-19. While macroeconomic data has exceeded expectations, analysts don’t really know what to expect from individual companies. Early reporters such as Nike and FedEx offered a glimpse of what’s to come. While Nike posted a surprise $790 million loss in the most recent quarter, FedEx roundly exceeded analyst expectations. Surprises – negative and positive – could push and pull stocks and sectors around in the weeks ahead. However, these reports will offer case-by-case studies on how the virus is impacting the economy.


Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.

There are a number of risks with investing in the market; if you want to learn more about them and other investment related terminology and disclosures click here.

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Brent Schutte, Northwestern Mutual Wealth Management Company Chief Investment Officer
Brent Schutte, CFA Chief Investment Officer

As the chief investment officer at Northwestern Mutual Wealth Management Company, I guide the investment philosophy for individual retail investors. In my more than 25 years of investment experience, I have navigated investors through booms and busts, from the tech bubble of the late 1990s to the financial crisis of 2008-2009. An innate sense of investigative curiosity coupled with a healthy dose of natural skepticism help guide my ability to maintain a steady hand in the short term while also preserving a focus on long-term investment plans and financial goals.