Was April the Bottom? Week of May 25 – 29

Consumers spent far less in April, but their sentiment stabilized in May. Here are the five things we learned from U.S. economic data released during the week ending May 29.

Personal spending was in freefall in April. The Bureau of Economic Analysis reports that real personal consumption expenditures (PCE) nosedived a seasonally adjusted 13.4 percent during the month following a 6.9 percent drop in March. (Both declines are larger than the previous record drop of 2.5 percent from January 1987.) Spending on goods slumped 15.8 percent, split between reductions for durable and nondurable goods of -16.7 percent and -15.5 percent, respectively. Virtually every category of goods experienced spending cuts, but food/beverages saw the largest percentage drop. Services expenditures dropped 12.0 percent, hurt particularly by spending declines for food services/accommodations and health care. Nominal (non-inflation adjusted) PCE narrowed 13.6 percent even though nominal personal income and disposable income surged 10.5 percent and 12.9 percent, respectively. These increases reflected CARES and expanded unemployment benefits. Real disposable income rose 13.4 percent. As a result, the savings rate was at a record +33.0 percent (it was at +7.9 percent as recently as January).

April’s business activity was utterly horrific. The Chicago Fed National Activity Index (CFNAI), a weighted average of 85 economic measures, fell to an all-time low (going back to 1967) in April to a reading of 16.74. This follows March’s reading of -4.97 and +0.05 in February. As a matter of context, a CFNAI reading of 0.00 suggests the U.S. economy is expanding at its historical rate.  Only six of the 85 economic indicators made a positive contribution to the CFNAI. All four major categories of indicators made substantial negative contributions: employment (-9.06), production (-5.63), sales/orders/inventories (-1.24), and personal consumption (-0.81). The CFNAI’s three-month moving average decreased to -7.22—typically a moving average reading worse than -0.70 indicates a recession,

The U.S. economy contracted during Q1 slightly more than previously believed. The Bureau of Economic Analysis’ second estimate of first-quarter 2020 Gross Domestic Product (GDP) finds economic output shrank 5.0 percent on a seasonally adjusted annualized basis. This was worse than the -4.8 percent estimate for Q1 GDP reported a month ago and the 2.1 percent GDP advance during the final three months of 2019. Not surprisingly, the freefall in consumer spending weighed heavily on Q1 GDP, costing 469-basis points in economic growth, but fixed investment (both residential and nonresidential), private inventory accumulation, and exports also made negative contributions. The same report featured the first estimate of Q1 corporate profits, which fell 13.9 percent during the quarter after having risen 3.6 percent during the final quarter of 2019. The BEA will revise its Q1 GDP and corporate profits estimate again in late June.

Consumer sentiment stabilized in May. The Conference Board’s Consumer Confidence index added 9/10^ths of a point during the month to a seasonally adjusted 86.6 (1985=100). This follows a “rapid decline” that saw the headline index shed 46 in two months. The current conditions index, however, lost another 1.9 points to 73.0 (the measure had lost nearly 100 points over the past few months). The expectations index advanced by 2.6 points to 96.9 (February 2020: 108.1). 52.1 percent of survey respondents see current economic conditions as being “bad” versus 16.3 percent seeing them as “good.” 43.3 percent of the same survey respondents expect business conditions will improve over the next six months, while 21.4 percent anticipate a further deterioration. The press release warned that “the uneven path to recovery and potential second wave are likely to keep a cloud of uncertainty hanging over consumers’ heads.”

The University of Michigan’s Index of Consumer Sentiment advanced by a half-point to a seasonally adjusted 72.3 (1966Q1 (and May 2019): 100.0). This was, however, off 1.4 points from the preliminary May reading reported a few weeks earlier. The current conditions index rebounded during the month to a reading of 82.3 (May 2019: 110.0), while the expectations shed 4.2 points to 65.9. The press released noted that CARES relief checks and expanded unemployment benefits have not “stimulate[d] discretionary spending due to uncertainty about the future course of the pandemic.”

Durable goods fell sharply again in April. The Census Bureau reports that new orders for manufactured durable goods slumped 17.2 percent to a seasonally adjusted $170.0 billion.  Transportation orders fell by nearly half (-47.2 percent), the result of cancellations for civilian aircraft and drastic order declines for military aircraft and automobiles. Net of transportation goods, core durable goods orders fell 7.4 percent, with declines among every significant industry segment. Durable goods shipment plummeted 17.7 percent to $192.3 billion, following a 5.5 percent drop in March.

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