In recent weeks, the unprecedented surge in claims for unemployment benefits pointed to a horrific economic impact from COVID-19. That sinking feeling has been reinforced by the major economic releases, which have shown a sharp deterioration in economic activity in March – enough to substantially weaken the first quarter as a whole. April, and the second quarter, will be worse. Now, as states begin to open up, the economic outlook isn’t much clearer. However, the risks are more apparent. This isn’t going to be a V-shaped bottom. The economy is sure to rebound, but it will take a long time to get back to the pre-pandemic level of activity and the new normal will be different from the old.
Real GDP fell at a 4.8% annual rate in the advance estimate for 1Q20. However, the figure was lifted by a 15.3% decrease in imports. Imports have a negative sign in the GDP calculation and the drop added 2.3 percentage points to the headline growth figure. Private Domestic Final Purchases (GDP less government, the change in inventories, and foreign trade), a better measure of underlying private domestic demand, fell at a 6.6% annual rate. Consumer spending fell 7.6%. Business fixed investment fell 8.6%. Residential fixed investment was a bright spot, rising at a 21.0% annual rate, but that’s unlikely to last (the Pending Home Sales Index fell 20.8% in March). Bear in mind that many states were not under strict social distancing guidelines for all of March. Most of the weakness appeared in the second half of the month. However, that weakness was severe enough to push the quarter as a whole sharply lower. While the 1Q20 GDP figures were worse than expected, we know that the second quarter decline will be even more severe.
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Jobless claims fell to 3.84 million in the week ending April 25, down in recent weeks but still extremely elevated. The total for the last six weeks was 30.3 million, but that is an exaggeration. Seasonal adjustment is multiplicative, so has amplified the headline figures. Prior to seasonal adjustment, 27.9 million people have filed claims in the past six weeks – that’s 17% of the labor force or one in six workers. That is gut-wrenching. There may be some duplication in these figures, as individuals get tired of waiting for their check and file again, but that should be very small. More likely, the reported figure understates the degree of weakness, as not every individual can file a claim. Rules vary by state, but in most cases, the self- employed and those working part-time can’t file. The CARES Act expands the eligibility. Still, it’s likely that many have fallen through the cracks.
Consumer confidence fell sharply in the initial estimate for April (86.9, vs. 118.8 in March and 132.6 in February). Within the report, the Present Situation Index fell 90 points, the largest decline on record. In the past, a year-over-year decline in the Present Situation Index has coincided with the start of a recession. Expectations for the economy and the job market improved in April, but that was from a much lower base. While consumers may be hopeful that the economy will re-open, they were less optimistic about their income prospects. Consumer attitudes should be highly sensitive to how the re-opening goes.
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The Chicago Fed’s National Activity Index, a composite of 85 economic indicators, fell sharply in April. The index is scaled so that zero represents trend growth. A three-month average of less than -0.7 is indicative of an increased chance that a recession has begun – it was -1.47 in March.
Consumer spending fell 7.5% in March (-7.3% adjusting for inflation), reflecting steep declines in motor vehicles (-26.5%), clothing (-29.8%), transportation services (-25.5%), recreation services (-29.5%) and restaurants (-26.4%), only partly offset by an increase in food-at-home (+19.8%).
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The ISM Manufacturing Index fell to 41.5 in April (vs. 49.1 in March), but it was worse than it looks. Longer supplier delivery times are normally a sign of strength, as manufacturers struggle to keep up with demand. In this case, the increase reflects virus-related supply chain disruptions. New orders (27.1), production (27.5), and employment (27.5) were well below the breakeven level (50).
A successful re-opening of the economy should be coordinated, with plenty of testing, and the ability to trace and isolate the contacts of infected individuals. Unfortunately, we are not there yet. The move into social distancing was haphazard across states and the re-opening is likely to be similarly chaotic. Nationally, we’re still seeing more than 25,000 new cases per day. Other countries have begun to open, but with new cases trending closer to zero. Testing, while improving, is still woefully inadequate. Opening too rapidly, as some states may do, will lead to a wider spread of the virus and a longer period of social distancing to contain a second, wider outbreak. It will take more than a few weeks to evaluate whether states are moving too fast. A V-shaped economic recovery is not going to happen, but until we get an effective treatment or a vaccine, we could see a repeated W, as states move to open and close their economies over time. Re-opening the economy should be a gradual process, but it may be uneven. (M20-3069232)
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