The shutdown late in Q1 inflicted significant damage. Here are the five things we learned from U.S. economic data released during the week ending May 1.
The shutdown ended GDP’s winning streak. The Bureau of Economic Analysis’ first estimate of Q1 Gross Domestic Product (GDP) has the U.S. economy contracting 4.8 percent on a seasonally adjusted annualized basis. This was the first quarterly decline in GDP in six years and the most significant contraction in economic activity since the fourth quarter of 2008. Of major GDP components, only fixed residential investment (housing), net exports (mainly because of a sharp drop in imports), and government expenditures made positive contributions. Falling consumption cost 5.26 percentage points in GDP growth, with a sizable portion of that coming from reduced spending on medical services (itself costing 225-basis points in GDP growth), followed by the declining expenditures on food services/accommodations, recreation services, clothing, and transportation services. The BEA will update its Q1 GDP twice over the next two months.
Personal income and spending tumbled in March. The Census Bureau reports that personal income dropped 2.0 percent on a seasonally adjusted basis during the month, its largest single-month decline in seven years. Disposable income suffered a matching 2.0 percent loss while real disposable income (which controls for inflation) fell 1.7 percent. (Note that as large as these declines are, they mostly reflect a slowdown in activity that occurred only during the latter half of the month.) Personal spending dove 7.5 percent (the biggest single-month drop in the 61-year history of the data series), with the inflation-adjusted measure off 7.3 percent. Real spending on goods slowed 2.2 percent, split by a 14.8 percent drop for durable goods and a 4.3 percent advance for nondurables. Spending on service fell 9.5 percent (hurt particularly by reduced expenditures on health care, food services/accommodations, and recreation services). The savings rate surged by 5.1 percentage points to 13.1 percent (its highest point since 1981).
The Federal Reserve sees the economic impact of COVID-19 not to be short-lasting. The opening sentence of the Federal Open Market Committee’s (FOMC) statement following its meeting last week was clear on its mission, noting that it “is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.” The statement added that the pandemic “poses considerable risks to the economic outlook over the medium term.” The committee voted unanimously voted to keep the fed funds target rate near zero percent, stating that it “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Also, the Fed will continue to purchase both Treasury securities and residential & commercial mortgage-backed securities. At the same time, the Open Market Desk will maintain its expanded overnight and term repurchase agreement operations.
The contraction of the manufacturing sector was widespread in April. The PMI, the headline index from the Institute for Supply Management’s Manufacturing Report on Business, lost 7.6 points to 41.5, its lowest reading since the depths of the Great Recession (April 2009). A PMI reading below 50.0 indicates a contracting manufacturing sector, and a reading below 42.8 suggests the U.S. economy is in a recession. All five components to the PMI also showed a slowdown in business activity. Only two manufacturing industries reported growth in April: paper products and food/beverages. The press release noted that “transportation equipment and fabricated metal products [were] the weakest of the big six sectors” of manufacturing.
Consumer sentiment plunged in April, but the outlook brightened a bit. The Conference Board’s Consumer Confidence Index plummeted 31.9 points during the month to a seasonally adjusted 86.9 (1985=100). The present conditions index, which captures survey respondents’ “assessment of current business and labor market conditions—suffered its largest ever decline, shedding 90.4 points to 76.4. The expectations index added 7.0 points to a reading of 93.8, reflective of some consumers’ belief (hope) of an easing of stay-at-home edicts. In March, 39.2 percent of survey respondents had seen then-current economic conditions as “good.” This percentage plummeted to 20.8 percent in April. The percentage of consumers seeing conditions as “bad” surged from 11.7 percent to 45.2 percent. Interestingly, consumers were much more optimistic about the future, with 40.0 percent expecting business conditions to improve (versus 18.7 percent in March). Also growing, however, was the percentage of respondents expecting conditions to worsen (25.7 percent versus 16.4 percent in March).
Other U.S. economic data released over the past week:
– Jobless Claims (Week ending April 25, First-Time Claims, seasonally adjusted): 3,839,000 (-603,000 vs. the previous week, +3,609,000 vs. the same week a year earlier). 4-week moving average: 5,033,250 (+2235.6% vs. the same week a year earlier).
– Construction Spending (March 2020, Value of Construction Put in Place, seasonally adjusted annualized rate): 1.361 trillion (+0.9% vs. February 2020, +4.7% vs. March 2019).
– Pending Home Sales (March 2020, Index (2001=100), seasonally adjusted): 88.2 (-20.8% vs. February 2020, -16.3% vs. March 2019).
– Agricultural Prices (March 2020, Prices Received by Farmers): +3.1% vs. February 2020, Unchanged vs. February 2019.
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What We Learned About the U.S. Economy Last Week 