The data releases last week were disappointing but not surprising, given the headwinds created by the widespread efforts to combat the spread of the coronavirus. Six million Americans filed for initial unemployment claims for the second week in a row, and the drop in consumer sentiment set a record. This week will be packed with important updates, with an emphasis on the March retail sales report on Wednesday and the weekly initial jobless claims report on Thursday.
Last week’s news
We started the week with Wednesday’s release of the FOMC minutes from the Fed’s emergency meetings on March 3 and March 15. To support the economy, the Fed decided to cut the federal funds rate down to effectively zero. The minutes largely confirmed what market participants already knew: the Fed is deeply concerned with the current economic environment and willing to use all available tools to protect the economy. Since the March 15 meeting, the Fed has announced a suite of quantitative easing measures, which have largely been met with positive market reactions. Ultimately, the minutes did not yield any major surprises, but they did provide reassurance that the Fed remains willing and able to support the economy during these trying times.
On Thursday, the Producer Price Index for March was released. Producer inflation declined by less than expected, with prices falling 0.2 percent during the month, against predictions for a drop of 0.4 percent. On a year-over-year basis, producer inflation came in at 0.7 percent, down from 1.3 percent in February but above expectations for 0.5 percent annual inflation. This drop was due in large part to lowered gas prices. The core inflation figure, which strips out energy and food prices, was up 0.2 percent for the month. In 2019, inflation remained well constrained, despite three rate cuts from the Fed during the year. This report signals the deflationary impact that the measures to stem the coronavirus are expected to create going forward.
Thursday also saw the release of the weekly U.S. initial jobless claims report for the week ending April 4. An additional 6.606 million Americans filed new unemployment claims during the week, bringing the three-week claims total to more than 16.5 million. This recent surge is unprecedented in U.S. history. It indicates that the unemployment rate will continue to climb in April, with a double-digit reading now all but assured. To put that expectation into context, during the great recession of 2007 to 2009, the unemployment rate peaked at 10 percent. So, the current disruption to the labor force has truly never been seen before. This weekly data release will be closely monitored until we see a tapering off in initial jobless claims.
On Thursday, the preliminary estimate of the University of Michigan consumer sentiment survey for April was released. This measure of consumer confidence fell by more than expected, from 89.1 in March to 71 in April, against calls for a drop to 75. This result, which brought the index to its lowest level since 2011, marks the largest single-month decline in its history. This survey included responses between March 25 and April 7, when the pace of layoffs was rapidly increasing. Consumer confidence is supported by rising equity markets and a healthy job market. So, it’s not a surprise that consumers reacted to the unprecedented pace of layoffs and the market volatility with sharply lower confidence. Rising confidence levels typically support additional consumer spending growth, so this sharp decline is a bad sign for spending figures to come for March and April.
We finished the week with Friday’s release of the Consumer Price Index report for March. Headline consumer inflation came in below expectations, falling 0.4 percent against forecasts for a 0.3 percent decline. This brought year-over-year consumer inflation to 1.5 percent in March, down from 2.3 percent in February. As was the case with producer inflation, falling gas prices were the major driver of lower headline inflation. Core inflation, which strips out volatile energy and food prices, also came in below expectations, falling by 0.1 percent during the month against expectations for a 0.1 percent increase. A large drop in airline fees and hotel expenses during the month offers a first glimpse at the impact that the economic slowdown will likely have on prices. The large-scale drop in consumer demand should serve as a headwind for short-term inflationary pressure.
What to look forward to
On Wednesday, the retail sales report for March will be released. Sales are projected to fall by an eye-catching 6 percent during the month, following a 0.5 percent decline in February. This result would represent the largest single monthly decline in retail sales history, beating the previous record of a 3.9 percent monthly drop set in November 2008. This figure will likely be partly attributable to lower gas prices, but the drawdown in spending is expected to be more widespread. The core retail sales figure, which strips out the impact of volatile auto and gas sales, is set to show a 4.7 percent decline for the month. Consumer spending accounts for roughly two-thirds of economic activity, so a sharp decline would be a very negative signal for overall economic growth.
Wednesday will also see the release of March’s industrial production report. Predictions are for a 4.1 percent drop in production during the month, following a better-than-expected 0.6 percent gain in February. This result would be in line with a 4.3 percent monthly decline in production that occurred in September 2008. Much of the expected drop-off should come from a steep decline in manufacturing output. The forecast is for this segment to fall by 3.1 percent, due to weaker global demand related to the coronavirus crisis. Manufacturer confidence and output were volatile throughout much of 2019 due to the escalating U.S.-China trade war. To start 2020, however, we saw signs of growth, which makes these projections all the more disappointing. Given the disruptions to the labor force and falling global demand, a rebound in manufacturing output appears unlikely until we can better control the spread of the coronavirus.
The third major data release on Thursday will be April’s National Association of Home Builders Housing Market Index. This measure of home builder sentiment is set to show a steep fall from 72 in March to 59 in April. This result would bring home builder confidence to its lowest level in more than a year; however, the index would still sit above the low-water mark of 56 set in December 2018. Home builders experienced steadily increasing confidence throughout 2019, as low mortgage rates spurred prospective buyers into the market. This trend led to a surge in new home construction during the year and into 2020, with housing starts reaching their highest monthly level in 13 years in January. If estimates for home builder sentiment hold, the cratering confidence would likely serve as a headwind for future construction.
Speaking of construction, on Thursday, March’s housing starts and building permits reports will be released. Both are expected to show significant declines for the month, with starts and permits slated to fall by 17.5 percent and 10.5 percent, respectively. While these releases can be volatile on a monthly basis, seeing further weakness in new home construction would not be surprising given the current health crisis. The strong run-up in construction in 2019 and the start of 2020 does help cushion the projected decline a bit. Without it, starts would be at levels last seen in September 2019 if the estimates hold. The housing sector has been an engine for economic growth for some time, but future weakness should be expected.
Finally, we’ll finish the week with Thursday’s release of the U.S. initial jobless claims report for the week ending April 11. Economists are currently estimating that an additional 5 million Americans will have filed new unemployment claims last week. This number would represent a decline from the average of 6 million new filers seen over the previous two weeks. Still, the report would show that roughly 22 million Americans lost their jobs over a four-week period—another indication of the unprecedented situation we now find ourselves in. We’ll continue to monitor this weekly release closely until we get a sign that the pace of layoffs and dismissals has begun to slow.
That’s it for this week—thanks for reading and stay safe!