Does Mastercard's Positive Data Mean the Economy Has Recovered?

As the COVID-19 pandemic swept across the world this winter and spring, economic activity has plunged. Though U.S. gross domestic product (GDP) only fell 4.8% in the first quarter, remember that government-imposed quarantines happened in the second half of March, just two weeks before quarter-end. For the second quarter ending this month, the Atlanta Federal Reserve Bank's GDPNow model projects U.S. GDP could decline a shocking 52.8%!

And yet, the stock market has rallied, even as unemployment has skyrocketed and GDP has fallen. Why? Because the market is forward-looking, and the most recent data shows things have been steadily improving over the past couple of months.

In fact, one of the biggest financial data providers out there is Mastercard (MA 0.42%), which has been releasing weekly operating data throughout the crisis. Despite the Fed's dour outlook, Mastercard's most recent data drop shows things may be improving more than expected.

Image source: Getty Images.

Baby steps to growth

Not only has Mastercard's weekly spending data shown a steady recovery, but  U.S. switched volumes have even turned positive during the last two weeks in June:

Data source: Mastercard. 

While it's not surprising to see spending data steadily improve as economic reopening has been happening since early May, to have U.S. switched volumes turn positive this early in the recovery is certainly a surprise.

But it may not be as great as it seems

Yet before you break out the champagne, a few things to note: Mastercard's data, while perhaps indicative of overall trends, isn't the same thing as the wider economy. In 2019, Mastercard reported 19% growth in switched transactions and 13% growth in gross dollar volume. Yet U.S. real GDP only grew 2.3% in 2019.

That's because Mastercard is disproportionately benefiting from the war on cash, as more and more economic transactions gravitate toward electronic payments solutions, often using credit and debit card networks such as Mastercard's.

Not only that, but the difference between the health of Mastercard and that of the overall economy during the first and second quarters of 2020 may be even more pronounced. That's because as more and more people are quarantined at home and afraid of handling physical cash, an even larger share of their spending is likely to be coming from card networks.

A looming deadline could also short-circuit growth

Not only might the electronic payments boon overstate Mastercard's strength relative to the overall economy, but the strength in consumer spending during May and June could also potentially come to an end in July.

That's because the increased CARES Act unemployment benefits, which gave laid-off workers an extra $600 in weekly benefits, is set to run out by July 31. In addition, the government's payment protection program (PPP) to small businesses is set to run out soon as well. The PPP was designed to provide forgivable loans to businesses, as long as they kept their employees on the payroll. However, the current PPP is nearly over, and it's likely many businesses might not be able to retain all of the workers they kept while under the terms of the PPP.

Absent another extension,  these small businesses may need to lay more people off, especially in the travel and hospitality industries. Should that happen, the unemployment rate could spike again, even above the historic mid-teens levels today.

A tenuous recovery

A new surge in unemployment combined with lower unemployment benefits means there's potentially a big hit to consumer spending on the horizon. Of course, with things improving, the economy is likely more able to stand on its own today than it was a few months ago when the CARES Act was signed. However, not renewing these programs could also undo a lot of the progress to date, sending consumer spending back in the wrong direction.

So while Mastercard's recent data is encouraging, investors should still cast a cautious eye on those figures. Even closer attention look should be paid to Washington, as Congress debates whether or not to extend these important relief programs.