(Bloomberg Opinion) -- Last Friday’s U.S. retail sales numbers provided comfort for both the V and the square-root economic recovery camps. But rather than mark the beginning of a consensus on what lies ahead, they highlight a durable debate raging not just on Wall Street, but also on Capitol Hill.
By adding 1.2% growth after the 8.4% rebound of the previous month, the overall level of retail sales has fully recovered from the sharp March-April decline and completed an impressive V-shaped recovery. With consumption accounting for almost 70% of gross domestic product, many on Wall Street now hope that investment will soon pick up strongly to solidify such a comeback for economic activity as a whole.Others see the data consistent with a less optimistic outlook for the U.S. economy. Noting the fall in the rate of improvement (the so-called second derivative), they worry that the best of the recovery may already be behind us. Some of the highest frequency indicators, as partial as they are, already point to a leveling off in activity.
The risk is that coming economic reports will fail to resolve these diverging views that pit the first and second derivatives in data series against each other. Yet the longer this difference persists, the greater the chance that the economy may not just level off, but contract. To understand why and how, you need to look at the way the debate plays out in Washington.
Republican lawmakers see the more optimistic interpretation as anchoring their resolve to hold off on the type of substantial relief bill that Democrats have been advocating. Some within the party go further, arguing that such legislation would undermine durable growth in three ways. First, by tilting incentives in favor of unemployment for those who earn more with enhanced supplementary unemployment benefits than they would at work. Next, by keeping inefficient companies alive, distorting resource allocations and eroding productivity growth. Last, by encouraging inefficient interventions in economic activity by local and state governments.
Democratic lawmakers take an opposite view, supported by the less optimistic take on the same data. For them, the slowing recovery risks turning temporary and reversible problems into longer-term ones that are more deeply embedded in the structure of the economy, and therefore more damaging and harder to solve. They see a strong case for action on measures that not only continue the exceptional support for those out of work and for companies risking closure, but also to backstop local and state governments that are large employers on their own account.