NAM: Monday Economic Report
The COVID-19 pandemic has dramatically disrupted supply chains, demand and production for manufacturers. A special survey conducted by the NAM and released March 12 examined the economic and operational impacts of COVID-19. More than 78% of manufacturers anticipate a financial impact, more than 53% of manufacturers anticipate a change in operations and more than 35% of manufacturers are facing supply chain disruptions as a result of COVID-19.
Meanwhile, fears of getting sick have forced closures and other measures to contain the virus from spreading further. The economic impacts of this are immense, especially as businesses and consumers pull back on spending and grapple with the additional costs. Financial markets have tumbled significantly over the past month, with equities in “bear” territory and bond yields shifting into record-low rates.
The turbulence in stock and bond markets will no doubt hamper confidence, potentially forcing more hesitance in spending, at least in the short-term. On the positive side, the record lows in interest rates have resulted in huge jumps in mortgage refinancing. That should help to spur further growth in housing construction and sales. With that said, preliminary data for March from the University of Michigan and Thomson Reuters suggest that consumer sentiment did not fall as much as feared. Final figures will be released on March 27.
The other notable development was the oil market battle between the Organization of the Petroleum Exporting Countries and Russia, which has pushed petroleum prices down to levels not seen since early 2016. This may likely result in sizable pullbacks in energy output, potentially damaging manufacturers and the macroeconomy, especially if the battle is prolonged.
There is great uncertainty in several significant factors contributing to our overall economic outlook. I expect the U.S. economy to grow around 1.2% in 2020, almost half of the pace seen in 2019, which was 2.3%. More importantly, though, the risk of a recession has increased substantially, especially given the pullback in spending related to the global COVID-19 pandemic and with the potential of further retrenchment in the energy sector.
We are likely to see reduced real GDP readings in the first and second quarters, especially given the global retrenchments in activity. Ideally, though, any downturn would be short-lived. A v-shaped recovery is entirely plausible in the second half of this year if activity rebounds once the current challenges abate.
Last week, the New York Federal Reserve Bank’s Open Market Trading Desk said that it would offer up to $1.5 trillion in repurchase agreements (“repo” market). Its previously announced plan to purchase $60 billion in short-term assets each month will now span a “wide variety of maturities.” According to its statement, “These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.”
Producer prices for final demand goods dropped by 0.9% in February, its largest monthly decline since September 2015. Lower input costs are likely due to disruptions in activity from COVID-19 worries. Core inflation for goods, which excludes food and energy, edged down 0.1% in February. Over the past 12 months, producer prices for final demand goods and services decelerated from 2.1% in January to 1.3% in February.
The Federal Open Market Committee is likely to pursue additional monetary stimulus at its next meeting on March 17–18, building on the emergency actions taken on March 3. The main concern will be deflationary pressures in the economy and a desire to extend the recovery and avert a downturn.