Retail Recovery Carries On for Second Straight Month

We've seen a lot of trouble come out of the retail sector over the last, well, several years is probably an appropriate measure. The shift to online—and following that the shift to mobile—has left some brick-and-mortar focused retailers like the Children's Place (NASDAQ: PLCE) and American Eagle (NYSE: AEO) struggling to recover. Some retailers, however, have done wonders keeping themselves in play through the worst conditions, and they've been rewarded accordingly with a second straight month of retail sector gains.

Pent-Up Demand Really Was a Factor

It didn't come as much of a surprise in May when the retail sector generated a sales increase of 18.2%. May was the first time many retailers were actually allowed by government mandate to re-open their doors following the first arrival of the coronavirus. That wasn't universal, of course; some governors and mayors decided that their people didn't really need those lousy retail jobs anyway and kept their states and cities shut longer.

However, with the arrival of June, even the most recalcitrant states managed to at least get restaurants opened up halfway again. That, along with the rest of the pent-up demand, gave retail sales another bump in June of 7.5%, which is actually 1.1% higher than it was this time last June. It was also about 50% better than what Reuters economists were offering as a consensus, at 5% gains.

That might not sound like much, but remember that the 18.2% jump was the highest jump seen since those figures had been tracked starting back in 1992. Expecting two solid months of highest-ever jumps, or even close to it, is a bit of a bridge too far.

Scattering Tacks on the Dragstrip

There are, however, several potential problems that have emerged in the wake of this excellent news on the retail sector. The first, and perhaps largest, is more government mandating that's pulling back on reopened retail and forcing potential shoppers either back to online retail or just back to their homes. That has a drag effect on employment as well; cash register jobs count just as much as nuclear physicist jobs, and perhaps more so since there are so many more of them.

That same unemployment serves as another drag effect, with potential consumers feeling that much more hesitant about the state of their own jobs to do a lot of retail spending. Given how much of our economy is built around consumerism, reductions in retail spending cut directly at the heart of the economy as a whole. The recovery we've seen so far, with many people resuming jobs that were shut down in March in response to the coronavirus, can't really continue if we return to shutdown states.

One final drag effect comes with the federal government's response to the coronavirus itself. The launch of the CARES Act not only expanded unemployment—the self-employed have never really had much access to the unemployment system, for example—but also expanded unemployment payouts, adding an additional $600 a week on top of whatever benefits each state saw fit to dole out.

That gave retail a shot in the arm when states started to reopen. With CARES Act provisions going dark with the end of July, and resurgences in unemployment preparing to start based on the number of states making noises about paused or reversed reopening plans, that shot of adrenaline to the economy's heart has been processed through and is likely to be no longer a factor.

A Future Fraught With Mystery

Trying to make sense out of the numbers as presented is something of a pocket nightmare. On the one hand, you have the coronavirus delivering knockout blows to retail for months on end, only to have those numbers snap back when the restrictions surrounding the disease are loosened even a little.

There's even some sign that some segments got helped by the coronavirus; car sales, for example, shot up like a rocket after coronavirus closures forced prices down and dropped interest rates alongside them. Car sales were up 8.2% at one point, as those car buyers whose jobs are still fairly secure took advantage of several once-in-a-lifetime conditions coming together to offer new cars at bargain rates.

Trying to puzzle out even the next three months is a disaster. Coronavirus death rates are dropping through the floor even as case rates are climbing. But with changes to the way cases are reported—they'll no longer go through the Centers for Disease Control (CDC) but rather to a centralized database facility—who knows how the infection rates will change from there? Certainly, the coronavirus is going to be one of the biggest economic drivers of the immediate future, so watching it will make particular sense going forward.

With what will easily be the strangest, most contentious, and shortest election in the last 50 years about to strike in November, that will only make a strange situation even more puzzling. The only reasonable recommendation that follows is to stay alert, because the future from here makes no sense.