GDP, Income, and Spending Plummet: April 27 – May 1

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.

#1The 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.

#2Personal 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). 

#3The 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. 

#4The 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.

#5Consumer 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.

The opinions expressed here are not necessarily those of Kevin’s current employer. No endorsements are implied.

Bracing for a Halt: March 16 – 20

This past week’s jobless claims data is only a taste of what is about to come. Here are the five things we learned from U.S. economic data released during the week ending March 20.

#1Jobless surged in mid-March, and that was only the tip of the iceberg. The Department of Labor reported that there were a seasonally adjusted 281,000 first-time claims made for unemployment insurance benefits during the week ending March 14. The surge of 70,000 applications from the prior week was the fourth largest jump in the 53-year history of the data series. The four-week moving average of first-time claims jumped by 16,500 to 232,250. Next week’s claims data will be historic as the full force of COVID-19 business shutdowns shows up, with some forecasters anticipating next week’s estimate showing two or three million claims. The DOL press release noted that many states reported pandemic-related layoffs with the impact centered on “service related industries broadly and in the accommodation and food services industries specifically, as well as in the transportation and warehousing industry.”

#2The Fed cut its short-term interest target to near zero percent and took other actions to support the credit markets. The Federal Open Market Committee (FOMC) canceled its two-day meeting scheduled for last week but voted to cut its fed funds target rate by a full percentage point to a range between 0.00 and 0.25 percent. This followed a half-percentage point cut earlier in the month. The statement noted that “the coronavirus outbreak has harmed communities and disrupted economic activity.” The FOMC expects to maintain this target rate until “it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Other steps taken by the Fed include an asset purchasing program for Treasury and mortgage-backed securities, the creation of a facility to inject liquidity into the money market fund market (including those linked to short-term state and municipal securities), and an expansion of its overnight and term repurchase agreement operations.

#3Leading indicators edged up in February for a final hurrah. The Conference Board’s Leading Economic Indicators added 1/10th of a point during the month to a reading of 112.1 (2016=100), following an 8/10ths of a point advance in January. Only four of the LEI’s ten components made positive contributions. The coincident index advanced by 3/10ths of a point to 107.6 while the lagging index rose by 4/10ths of a point to 109.1. The subhead of the press release said it all: “Improvement in [the] Index Will Not Continue into March.” Noting the sharp declines in the stock prices, consumer sentiment, and hours worked, the press release concluded that “the economy may already be entering into a period of contraction.” 

#4Retail sales fell in February. The Census Bureau indicates that U.S. retail and food services sales dropped 0.5 percent during the month to a seasonally adjusted $528.1 billion. Some of the softness came from weakness at auto dealers/parts stores (-0.9 percent) and gas stations (with lower prices pulling down sales 2.8 percent). But even core retail sales were off 0.2 percent from January. There was weakness across most retail sectors; including, electronics/appliance stores (-1.4 percent), building materials retailers (-1.3 percent), apparel stores (-1.2 percent), restaurants/bars (-0.5 percent), furniture retailers (-0.4 percent), and department stores (-0.2 percent). Retail sales were up 4.3 percent from a year earlier, with core sales having a 12-month comparable of +4.4 percent.

#5Manufacturing output continued struggling in February. Even though the Federal Reserve finds manufacturing production grew a seasonally adjusted 0.1 percent during the month, with output 0.4 percent below that of a year earlier. Durable goods production gained 0.3 percent, boosted by motor vehicle production, while nondurables output declined 0.1 percent, pulled down by textiles, petroleum/coal products, and chemicals. Overall industrial production rose 0.6 percent in February, matching its year-ago level. Mining output slumped 1.5 percent while utility output surged 7.1 percent (with both electric and gas utilities reporting large increases).

Other U.S. economic data released over the past week:
Existing Home Sales (February 2020, Sales of Previously Owned Homes, seasonally adjusted annualized rate): 5.77 million units (+6.5% vs. January 2020, +7.2% vs. February 2019).
Job Openings and Labor Turnover (January 2020, Nonfarm Job Openings, seasonally adjusted): 6.963 million (+411,000 vs. December 2019, -557,000 vs. January 2019).
Business Inventories (January 2020, Manufacturers’ and Trade Inventories, seasonally adjusted): $2.035 trillion (-0.1% vs. December 2019, +1.1% vs. January 2019).
Housing Market Index (March 2020, Index (>50=More Homebuilders Viewing Housing Market as “Good” vs. Being “Poor,” seasonally adjusted): 72 (vs. February 2020: 74, vs. March 2019: 62).
Treasury International Capital Flows (January 2020, Net Foreign Purchases of U.S. Securities, not seasonally adjusted): +$28.0 billion (vs. December 2019: +$65.7 billion, vs. January 2019: -$24.8 billion).

The opinions expressed here are not necessarily those of Kevin’s current employer. No endorsements are implied.

Employers Hire, The Fed Cuts: March 2 – 6

While not impacting the labor market yet, the coronavirus pushed the Fed to take action and weighed on purchasing managers’ business outlook. Here are the five things we learned from U.S. economic data released during the week ending March 6.

#1Hiring activity surged in February. Nonfarm payrolls rose by a seasonally adjusted 273,000 during the month, matching January’s gain as the most since early 2018. The same Bureau of Labor Statistics’ report also presented upward revisions for January and December payrolls that reflected the addition of 85,000 more workers that previously reported. (One caution to the February figures is that the BLS collected most of its February data by mid-month and may not reflect a possible hiring slowdown as the impact of coronavirus was spreading across the nation and world.) The goods-producing side of the economy added 61,000 jobs while service sector employment swelled by 167,000 workers. Industries experiencing the biggest payrolls gains included health care/social assistance (+56,500), leisure/hospitality (+51,000), government (+45,000), construction (+42,000), and professional/business services (+41,000). Average hourly wages of $981.09 were up 3.0 percent from a year earlier.

Based on a separate households survey, the unemployment rate slipped 1/10th of a point to 3.5 percent (a multi-decade low hit several times over the past year). Contracting was the labor force, shedding 60,000 people. The labor force participation rate held steady at 63.4 percent while the same measure for adults aged 25 to 54 backed off by 1/10th of a point to 83.0 percent. The median length of unemployment dropped by 2/10ths of a week to 9.1 weeks, while the number of part-time workers seeking a full-time job grew 136,000 to 4.318 million.

#2The Federal Reserve cut its short-term interest rate target to offset economic impacts from the coronavirus. The statement released from this past week’s emergency meeting of the Federal Open Market Committee stressed that “[t]he fundamentals of the U.S. economy remain strong. But due to “evolving risks to economic activity” from COVID-19, the committee unanimously voted to cut the fed funds target rate by a half-point to a range of 1.00 and 1.50 percent. The statement also stressed that the FOMC was “closely monitoring” the situation and “will use its tools and act as appropriate to support the economy.”

#3Trade activity slowed in January. The Census Bureau and Bureau of Economic Analysis report that exports declined $0.8 billion to $208.6 billion (up 1.1 percent from January 2019) while imports dropped $4.2 billion to $253.9 billion (down 2.4 percent from January 2019). The resulting trade deficit of -$45.3 billion was $3.3 billion smaller than that of January and 15.8 percent from a year earlier. The goods deficit narrowed by $2.6 billion to -$67.0 billion while the services surplus expanded by $0.6 billion to +$21.7 billion. Weighing on January export activity were declines for civilian aircraft and crude oil. The U.S. had its biggest goods deficits with China, the European Union, and Mexico.

#4Supply managers report a flat manufacturing sector and growth in services during February. The PMI, the headline index from the Institute for Supply Management’s Manufacturing Report on Business, shed 8/10th of a point to 50.1. This was the second month in which the PMI was above the critical growth/contraction threshold of 50.0. The most notable among the PMI components was the measure of supplier deliveries, adding 7/10ths of a point to 51.7. Readings above 50.0 for this measure are indicative of slowing deliveries with some comments from survey respondents reporting delayed shipments from “coronavirus-impacted countries.” Fourteen of 18-tracked manufacturing industries expanded in January, led by wood products, furniture, and plastic/rubber products. The press release stated that despite the current challenges, respondents’ comments were “marginally positive regarding near-term growth.”

The ISM’s service sector measure of business activity, the NMI, added 1.8 points to a reading of 57.3. This was the 121 consecutive month in which the service sector had expanded. Three of our NMI components—new orders, employment, and supplier deliveries—grew during the month, while the mark for business activity fell. Sixteen of 18 service sector industries reported growth in February, led by accommodation/food services and management of companies/support services. The press release indicated the survey respondents were “concerned about the coronavirus and its supply chain impact.”

#5Factory orders slowed in January. The Census Bureau estimates new orders for manufactured goods declined 0.5 percent to a seasonally adjusted $497.9 billion. Transportation goods orders slipped as a slowdown in orders for defense aircraft and ships/boats counterbalanced a jump for civilian aircraft and motor vehicles. Net of transportation goods, core factory orders slowed 0.1 percent. Rising were orders for primary metals (+2.1 percent), and machinery (+2.1 percent), and fabricated metal products (+1.1 percent). Falling were orders for electrical equipment/appliances (-1.1 percent), nondurable goods (-0.8 percent), and computers/electronics (-0.2 percent). A proxy for business investment (orders for civilian nonaircraft capital goods) grew 1.1 percent. Shipments fell for the third straight month, losing 0.5 percent to $501.8 billion, while inventories contracted 0.1 percent to $703.4 billion. Unfilled orders essentially held steady at $1.157 trillion.

Other U.S. economic data released over the past week:
Jobless Claims (week ending February 29, 2020, First-Time Claims, seasonally adjusted): 216,000 (-3,000 vs. previous week; -2,000 vs. the same week a year earlier). 4-week moving average: 213,000, -3.8% vs. the same week a year earlier).
Productivity (2019 Q4, Nonfarm Business Labor Productivity, seasonally adjusted annualized rate): +1.2% vs. 2019 Q3, +1.8% vs. 2018 Q4.
Construction Spending (January 2020, Value of Construction Put in Place, seasonally adjusted annualized rate): $1.369 trillion (+1.8% vs. December 2019, +6.8% vs. January 2019).
Wholesale Inventories (January 2020, Total Inventories of Merchant Wholesalers, seasonally adjusted): $671.6 billion (-0.4% vs. December 2019, +0.4% vs. January 2019.
Consumer Credit (January 2020, Outstanding Non-Real Estate-Back Consumer Loan Balances seasonally adjusted): $4.203 trillion (+12.0 billion vs. December 2019, +4.4% vs. January 2019).
Beige Book

The opinions expressed here are not necessarily those of Kevin’s current employer. No endorsements are implied.