Monday I promised some detail on the shift of spending from services to goods. Via Bloomberg:

In the world of investing, self-storage properties are about as bland as it gets. Then again, U.S. consumers are going to need a place to store the mountains of stuff they bought during the pandemic. Retail sales soared 1.9% in September, more than doubling analysts’ estimates of a 0.8% gain. The surge came despite the end of enhanced unemployment benefits at the end of July. Although concern is rising that the absence of a new fiscal aid package will cause retail sales to falter, such worries give too much importance to fiscal aid in supporting retail sales and not enough importance to the changing composition of household spending.

The point is to not confuse retail sales with overall spending. The services sector captured in overall spending is larger than the goods sector. Overall spending is down in line with incomes less transfer payments, but the shift from services to goods boosted retail sales. I wouldn’t be surprised by a blowout holiday season for retailers not because the economy is great but because you can’t travel.

Separately, Federal Reserve Governor Lael Brainard spoke Wednesday. The theme:

Further targeted fiscal support will be needed alongside accommodative monetary policy to turn this K-shaped recovery into a broad-based and inclusive recovery.

This is a good sentence that I think highlights a key split in the commentary. One segment, of which I am a member, tends to emphasize that the recovery is likely self-sustaining at this point. Moreover, I argue that there is substantial upside risk in 2021 given the large stock of accumulated savings and the possibility or even likelihood of a vaccine. I don’t think we suffer through another nationwide shutdown as occurred this past spring even in the event of a surge in Covid-19 cases; more targeted and rolling shutdowns will be more likely. Overall, the economy will continue to grow around the virus.

Another segment of the commentary emphasizes the need for additional fiscal stimulus. This often sounds as if the recovery will reverse in the absence of that stimulus, an increasingly difficult position to hold given that the enhanced unemployment benefits ended in July yet the economy has not nosedived. Brainard gets it right though. The real risk from a lack of fiscal stimulus is not so much that the economy can’t recover but that the recovery will more likely be neither broad-based nor inclusive and thus slower than optimal.

Brainard on the recovery:

Targeted interventions, along with adaptations in the behavior of households and businesses, have enabled economic activity to recover. All told, after an unprecedented contraction in the first half of the year, U.S. gross domestic product appears likely to have reversed more than one-half of that decline in the third quarter.

I don’t think this is entirely accurate. What enabled the economy to recovery was reopening the economy. Fiscal policy helped, but it helped because it could help, because the economy began to reopen. There is only so much fiscal policy can do if you can’t open the doors.

More Brainard:

Overall, total consumer expenditures in the United States have recovered about three-fourths of their spring decline through August.

Yes this. Don’t be fooled by retail sales into thinking that consumer spending has recovered. Brainard is correct. This though needs some clarity:

Interest-sensitive sectors such as residential real estate and autos have rebounded strongly—a welcome reminder of the power of monetary accommodation, especially when coupled with necessary fiscal support.

Interest rates on auto loans are down just a notch, just 47 bps since January. And lower rates in housing help, but fundamentally the demographics are driving the train there. I think this points to some fundamental tailwinds the economy has now that it didn’t have in 2009 and that those tailwinds are not widely appreciated.

Brainard acknowledges easy credit conditions for large firms while seeing the core of the problem in lending markets:

Small businesses tend to be concentrated in sectors that entail high direct contact, operate with relatively tight cash buffers, and rely on bank credit rather market-based finance.

The key is “high-direct contact.” With the pandemic, many of those firms simply can’t get customers and if you can’t get enough customers you can’t get a bank loan. Brainard also highlights the particular challenges for minority-owned small businesses. She then proceeds through a discussion of the unevenness of the labor market. This is I think the most important long-term problem:

The recent decline in prime-age labor force participation has been due primarily to women. September marks the third consecutive monthly decline in the prime-age female LFPR since it bounced back in May and June. The decline in September, when many schools moved to virtual instruction, was especially pronounced for women ages 35 to 44. Indeed, the fraction of prime-age respondents to the Current Population Survey in September with children ages 6 to 17 who reported being out of the labor force for caregiving reasons was about 14 percent, up nearly 2 percentage points from a year earlier.⁵ If not soon reversed, the decline in the participation rate for prime‑age women could have longer-term implications for household incomes and potential growth.

I think we probably need some aggressive government intervention to revive the child care market to sustain the labor force participation of women. Getting a vaccine and K-12 schools open next fall thought would help too obviously. Brainard harkens back to the good old days of really just 9 months ago:

In the years before the pandemic, I was encouraged to see prime-age individuals in all demographic groups drawn into the strong labor market, reversing the previous decline in participation and boosting the productive capacity of the economy.

And then lays out what will happen if we can’t reverse current trends:

Persistent spells out of employment risk harming not only the prospects of these individuals, but also the economy’s potential growth rate.

We are in an uncomfortable situation. The more we pump up the economy, the more we shift the structure of the economy away from the services we will want next year. Next year then we will have to restructure the economy again. We can use more targeted aid to support those services now, but the resulting spending will still pump up the wrong sector of the economy. Getting this right might not be as easy as it seems. The key is targeted support:

The recovery will be broader based, stronger, and faster if monetary policy and fiscal policy both provide continued support to the economy. While monetary policy has helped keep credit available and borrowing costs low, fiscal policy has replaced lost incomes among households experiencing layoffs and businesses and states and localities suffering temporary drops in revenue.

The first round of stimulus was fairly broad-based with the tax rebates and PPP lending. A more targeted approach would be preferable in the next round to minimize remaking the economy in a direction we would won’t demand next year.

Brainard discusses the Fed’s new policy framework and concludes rates will be near-zero for a long time, which isn’t exactly news. This though is interesting:

In conjunction with the forward guidance on the policy rate, the commitment to continue asset purchases at least at the current pace over coming months is also helping to achieve our goals by keeping borrowing costs low for households and businesses along the yield curve. As noted in the September FOMC minutes, in the months ahead, we will have the opportunity to deliberate and to clarify how the asset purchase program could best work in combination with forward guidance to support achievement of maximum employment and 2 percent average inflation.

The Fed has committed to holding rates at zero until actual inflation is sustainably at 2% but has made no such similar commitment with asset purchases. Here she suggests that such guidance will not be coming anytime soon.

Bottom Line: We can believe both that the economic recovery will continue and that the recovery would greatly benefit from targeted fiscal stimulus.