Last week’s economic updates came in mixed, with the solid results for consumer confidence in May offset by historically bad spending figures in April. Once again, this week will be packed with updates, with a focus on business confidence, international trade, and the May employment report.
Last week’s news
We started the week with Tuesday’s release of the Conference Board Consumer Confidence Index for May. Confidence rose from a downwardly revised 85.7 in April to 86.6 in May. This result was slightly worse than expectations for an increase to 87, but it is still a step in the right direction. Confidence stabilizing as the country begins to reopen indicates that consumers are likely optimistic that the reopening efforts will be successful as we head into the summer. Consumer expectations for the future increased during the month; however, views of the present condition worsened modestly. Overall, this was a largely positive report, as it indicates that consumer confidence may have bottomed in April and could be set to rebound as states continue to reopen. This will continue to be a widely monitored data report, as hopes of a swift economic recovery largely rely on a quick rebound for consumer confidence and spending.
Tuesday also saw the release of April’s new home sales report. New home sales came in much better than expected, increasing modestly from a downwardly revised annual rate of 619,000 in March to 623,000 in April, against forecasts for a fall to 480,000. Despite this better-than-expected performance during the month, the pace of new home sales is still down notably from the recent high of 717,000 set in January. Last year saw strong growth in new home sales, and this momentum continued into the start of 2020 before the pandemic hit. Looking forward, the slowdown in new home construction in March and April will likely serve as a headwind for future new home sales due to lowered supply in key markets.
On Thursday, the second estimate of first-quarter GDP growth was released. The pace of economic growth was revised down from an annualized –4.8 percent to –5 percent for the quarter. Personal consumption, which was the major driver of GDP growth in 2019, improved slightly to –6.8 percent annualized during the quarter, from an initial estimate of –7.6 percent. Even with this better-than-expected revision, this result represents the worst quarter for personal consumption since 1980. Although these very weak growth figures are concerning, they are likely just the tip of the iceberg. Economists are currently forecasting a 33.5 percent annualized contraction for the economy in the second quarter.
Thursday also saw the release of the preliminary estimate of April’s durable goods orders report. Orders came in slightly better than expected, falling by 17.2 percent during the month against forecasts for a 19 percent decline. As was the case in March, much of the decline in April’s headline orders can be attributed to a fall in volatile aircraft orders. Core durable goods orders, which strip out the impact of volatile transportation orders, came in much better than expected, falling 7.4 percent against calls for a 15 percent decline. While this result was a positive development, it still represents the largest single-month drop in core orders in more than a decade. Core durable goods orders are often used as a proxy for business investment, so this report indicates that already weak business spending in the first quarter worsened to start the second quarter.
The third major data release on Thursday was the weekly initial jobless claims report for the week ending May 23. This report showed that an additional 2.123 million Americans filed initial unemployment claims during the week, surpassing estimates for 2.1 million claims. Claims are down from the week before, marking eight straight weeks of declining initial claims. While this is a positive development, the major focus during the week was on the continuing jobless claims report, which showed claims falling from just under 25 million to roughly 21 million for the week ending May 16. Representing the first weekly decline in continuing unemployment claims since the beginning of the pandemic, this report indicates that May might have been a turning point for employment as states began the slow process of reopening. Although the positive results were encouraging, both initial and continuing claims remain well above historical norms and have a long way to go to get back to normal levels.
On Friday, April’s personal income and personal spending reports were released. Personal spending fell by 13.6 percent during the month, which was worse than the expected 12.8 percent decline. This result marks the worst monthly drop in spending since records began in 1959—which is notable given that consumer spending accounts for roughly two-thirds of total economic activity in the U.S. Personal income increased by 10.5 percent during the month, far surpassing estimates for a 5.9 percent decline. Income was boosted by CARES Act stimulus payments to consumers during the month. Despite the better-than-expected result for income growth, April’s historically bad consumer spending numbers highlight the massive disruption caused by shelter-in-place orders.
Finally, we finished the week with Friday’s release of the second and final estimate of the University of Michigan consumer sentiment survey for May. Consumer confidence fell slightly, down from 73.7 midmonth to 72.3 at month-end, against expectations for a modest increase to 74. Despite the intramonth decline, this represents a step in the right direction following the eight-year low of 71.8 the index hit in April. The small monthly increase echoes the results from the Conference Board survey released earlier in the week. As is the case with the Conference Board report, this release will be widely followed. It will give a glimpse into how consumers are reacting to the gradual reopening of the economy as we head into the summer.
What to look forward to
We started the week with Monday’s release of the ISM Manufacturing index for May. This measure of manufacturer confidence increased modestly from 41.5 in April to 43.1 in May, against expectations for a larger increase to 43.8. While this gain was a positive development, this is a diffusion index, where values below 50 indicate contraction, so the index remains at a concerning level. The manufacturing industry was hard hit in April by factory shutdowns and a steep drop in global demand due to the pandemic, but efforts to reopen factories in May bolstered confidence modestly. While the factory openings should be a tailwind for manufacturer confidence in the short term, the drop in global demand will likely linger and serve as a headwind for a swift increase in this indicator.
Wednesday will see the release of the ISM Nonmanufacturing index. This measure of service sector confidence is also expected to increase modestly, from 41.8 in April to 44 in May. This is another diffusion index, where values below 50 indicate contraction. So, while the projected May increase would be positive, confidence would still sit well below levels needed to support a swift economic recovery. Ultimately, while an uptick in business confidence would certainly be welcome, modest increases linked to reopening efforts would be unlikely to significantly increase business investment without a marked improvement in economic conditions.
On Thursday, the initial jobless claims for week ending May 30 will be released. Economists expect to see an additional 1.8 million initial unemployment claims filed during the week, marking the ninth straight week of declining initial claims. This result would bring the total amount of initial claims filed during the pandemic up to roughly 42 million. Despite the anticipated decline for initial claims in the last week of May, we will continue to closely monitor this weekly release until levels get closer to historical norms. We will also be keeping a close eye on the continuing claims report set to be released at the same time, to see if the decline the previous week is sustainable or a one-off result.
Thursday will also see the release of the April international trade report. The trade deficit is expected to narrow, from $44.4 billion in March to $41.5 billion in April. Previously released data for the trade of goods during the month showed exports falling by more than 25 percent in April, offsetting a 14.3 percent decline for imports over the same period. That data brought the trade gap for goods to its widest level in seven months. Looking forward, trade is expected to show continued weakness in the short term, as the disruptions caused by the pandemic should serve as a headwind for global trade growth.
We’ll finish the week with Friday’s release of May’s employment report. Economists expect to see 8 million additional jobs lost during the month, following more than 20 million job losses in April. This would bring the unemployment rate up to 19.5 percent, notably higher than the 14.7 percent unemployment rate reported in April. For context, this would be the worst result for unemployment since the Great Depression, when the unemployment rate was estimated to peak at just under 25 percent. Given the continued pace of mass layoffs throughout May, the unemployment report will likely reflect the truly devastating impact that anticoronavirus measures have had on the livelihood of millions of Americans.
That’s it for this week—thanks for reading and stay safe!