NAM: Monday Economic Report
Americans stayed home and reduced their overall spending in March, as consumers grappled with the COVID-19 outbreak. Personal consumption expenditures plummeted by a record 7.5% in March, with goods and service-sector spending down 3.1% and 9.5% for the month, respectively. Durable goods consumption declined a jaw-dropping 15.1% in March, but nondurable goods spending rose 3.1%, a figure that likely includes food and paper products.
The saving rate soared from 8% in February to 13.1% in March, the highest rate since November 1982. At the same time, personal income decreased 2% in March, with 1.4% growth year-over-year.
With sharp pullbacks in consumer and business activity, the U.S. economy shrank by an annualized 4.8% in the first quarter, the largest quarterly decline since the fourth quarter of 2008. The housing market and government spending were bright spots, but personal spending, nonresidential fixed investment and inventory spending were significant drags on growth. Slowing global trade activity, particularly for goods imports, made net exports the largest positive contributor to real GDP growth in the first quarter, but for the wrong reasons.
The U.S. economy is expected to contract by a mind-numbingly large 30% at the annual rate, or perhaps more. Once the COVID-19 outbreak starts to abate, economic activity should improve, with real GDP rebounding strongly in the third quarter. Yet, the economic damage will have been done, with the U.S. economy declining 4.1% in 2020.
The ISM® Manufacturing Purchasing Managers’ Index® fell at the quickest rate since April 2009, down from 49.1 in March to 41.5 in April. There was a record decline in production in the survey dating to January 1948. Likewise, the index for employment was the lowest since June 1949. New orders and exports both fell at rates not seen since December 2008. Roughly 60% of survey respondents in April said that sales and output were lower for the month.
In a similar fashion, manufacturing activity in the Dallas and Richmond Federal Reserve Bank districts fell at the fastest paces on record in April, with the COVID-19 pandemic and sharply reduced energy prices challenging businesses in both regions. Respondents were also negative in their outlook for the next six months.
There were 3,839,000 initial unemployment claims for the week ending April 25, down from the 4,442,000 claims added for the week ending April 18. These continue to be unprecedented levels, suggesting that 30.31 million Americans filed for unemployment insurance in the past six weeks as the economic toll of the COVID-19 crisis takes hold.
Meanwhile, continuing claims increased from 15,818,000 for the week ending April 11 to 17,992,000 for the week ending April 18 in this report, a new all-time high. The latest figure suggests that 12.4% of the workforce received unemployment insurance that week, a rate that will continue to increase substantially given the initial claims data.
The unemployment rate could peak around 20% or more this month before starting to fall. The current forecast is for the unemployment rate to be 9% to 10% by year’s end—a shocking turn of events in the labor market following February’s 50-year low, which registered 3.5%.
According to the Conference Board, consumer confidence fell dramatically from 118.8 in March to 86.9 in April, the lowest level since June 2014. The decline in April stemmed from weakened assessments of the current economic environment, with that index experiencing the largest monthly drop on record, pulled lower by labor market and income worries. On the encouraging side, Americans felt cautiously optimistic for a rebound.
The Federal Open Market Committee continued to keep interest rates historically low, with the federal funds rate at zero to 25 basis points, to help stabilize economic growth. Indeed, the Federal Reserve has already taken dramatic steps over the past few months, reducing rates by 150 basis points and introducing new lending programs to ensure adequate liquidity in business and financial markets.
The FOMC will also continue to purchase securities aggressively over the coming weeks. The Federal Reserve’s balance sheet has already ballooned $2.5 trillion since the end of February, with total assets of nearly $6.7 trillion last week—a figure that is expected to exceed $10 trillion by summer.