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Last week was packed with economic updates that touched on wide swaths of the economy. The first estimate of second-quarter GDP growth drew a lot of attention. It showed the economy contracted at the fastest quarterly rate on record, highlighting the devastating economic impact of anti-coronavirus measures. This will be another relatively busy week for economic updates, with a focus on business confidence and the July employment report.
Last week’s news
On Monday, June’s preliminary durable goods orders report was released. Durable goods orders increased by more than expected, rising 7.3 percent during the month against forecasts for a 6.9 percent increase. This result follows a downwardly revised 15.1 percent increase in May that was supported by factory reopening efforts throughout the month. Core durable goods orders, which strip out the effect of volatile transportation orders, increased by 3.3 percent in June, slightly below expectations for a 3.6 percent increase. Core durable goods orders are often used as a proxy for business spending. As such, the continued rebound in core orders that we saw in June is a reassuring sign that business spending was bolstered by reopening efforts and likely held up better than originally expected when reopening efforts began in May.
Tuesday saw the release of the Conference Board Consumer Confidence Index for July. Consumer confidence fell by more than expected during the month. It went from 98.3 in June to 92.6 in July, against forecasts for a more modest decline to 95. This disappointing result is in line with similar declines in the preliminary reading of the University of Michigan consumer sentiment report for the month. This larger-than-expected decline was caused by falling expectations for future economic growth, as consumers likely see rising case counts as a headwind to faster growth going forward. The index still sits above the recent low of 85.7 that we hit in April, so this result still represents an improvement in confidence compared with the height of the crisis. But improving consumer confidence typically supports faster consumer spending growth, so this sharp decline in confidence is concerning and should be monitored going forward.
On Wednesday, the Federal Open Market Committee released its rate decision for its scheduled July meeting. The Fed cut the federal funds rate to virtually zero at the start of the pandemic, and there were no changes made at this meeting, as expected. Economists do not anticipate any rate hikes for at least the next two years. Fed members also showed continued support for open market purchases of Treasury and mortgage-backed securities over the upcoming months. At his post-meeting press conference, Fed Chair Jerome Powell reiterated the Fed’s commitment to using all of the available tools to support the ongoing economic recovery. Powell noted that while rising case counts remain a large concern, additional fiscal stimulus from Congress would be seen as a positive development and would likely be necessary to support a continued swift rebound in economic activity.
On Thursday, the weekly initial jobless claims report for the week ending July 25 was released. Initial unemployment claims increased during the week, up to 1.434 million from 1.422 million the week prior. This marks the second week in a row with increasing initial claims, indicating that slowing reopening efforts and rising case counts led to increased pressure on the job market in July. Continuing unemployment claims, which are reported with a one-week lag to initial claims, also increased, from 16.151 million to 17.018 million. These disappointing reports highlight the continued headwinds to the job market created by the pandemic and are a concerning development given the high unemployment rate and the signs of declining consumer confidence we’ve seen during the month. Ultimately, a weakening job market would serve as a headwind for a faster economic recovery, so this will continue to be a closely monitored weekly release.
Thursday also saw the release of the first estimate of GDP growth for the second quarter. The economy contracted at an annualized rate of 32.9 percent during the quarter, which was slightly better than economist estimates for a 34.5 percent annualized contraction. This is the worst single quarter for economic growth in modern history, surpassing the 8.4 percent annualized decline in the fourth quarter of 2008. This report shows the devastating impact that anti-coronavirus measures had on the economy during the quarter. A sharp drop in personal consumption was the primary driver of the economic contraction during the quarter, as the 34.6 percent annualized decline in consumption was the largest quarterly decline on record. These are certainly concerning figures, but it’s important to recognize that this is backwards-looking data and that economists anticipate a double-digit rebound in GDP growth in the third quarter that will help partially offset the damage caused by anti-coronavirus measures in the second quarter.
On Friday, June’s personal income and personal spending reports were released. Results were mixed, as spending increased by more than expected, while incomes fell by more than forecast. Personal spending increased by 5.6 percent in June, against calls for a 5.2 percent increase. Personal spending staged an impressive recovery in May, rising 8.5 percent after falling by more than 12 percent in April, and this continued spending growth for June was expected given the strong retail sales growth we saw during the month. Personal income, on the other hand, fell by 1.1 percent against forecasts for a 0.6 percent decline. Incomes have been volatile due to the $1,200 stimulus payments that were distributed in April, causing the index to increase by a record 12.1 percent in April before declining 4.4 percent in May. Given the lack of recurring government stimulus payments during the month, the decline in income that we saw makes sense.
We finished the week with the second and final estimate for the University of Michigan consumer sentiment survey for July. Consumer confidence fell by more than expected during the month, from 73.2 midmonth to 72.5 at month-end, against expectations for a more modest fall to 72.9. As was the case with the Conference Board measure of consumer confidence, rising case counts throughout the month likely served as a headwind for consumer sentiment in July. The index hit an eight-year low of 71.8 in April, so this decline brought consumer sentiment near recent lows after seeing a partial rebound to 78.1 in June. Ultimately, the declines that we saw in July for both major measures of consumer confidence indicate that the economic recovery we saw in May and June likely moderated notably in July and are a bad sign for July’s consumer spending reports.
What to look forward to
We started the week with Monday’s release of the ISM Manufacturing index for July. This measure of manufacturer confidence increased by more than expected. It rose from 52.6 in June to 54.2 in July, against forecasts for a more modest increase to 53.6. This better-than-expected result marks an impressive three-month rebound for manufacturer confidence after the index hit a multiyear low of 41.5 in April. This is a diffusion index, where values below 50 indicate contraction and values above 50 indicate expansion. So, this quick recovery up to expansionary territory once reopening efforts began was quite welcome. The index now sits at its highest level in more than a year, which is a good sign for business spending and investment as the economic recovery continues.
On Wednesday, the international trade report for June is set to be released. The trade deficit is expected to narrow during the month, from $54.6 billion in May to $50.3 billion in June. May saw the trade deficit reach its widest point in more than a year. If expectations prove to be accurate, it would bring the deficit closer to levels seen throughout much of 2019. Both exports and imports are expected to show solid growth during the month, after the pace of international trade fell to its lowest overall level in more than a decade in May. Looking forward, both imports and exports are expected to show continued recovery over the next few months; however, given the disruption created by the pandemic, it will likely take a long time before trade volumes recover to pre-crisis levels.
Wednesday will also see the release of the ISM Nonmanufacturing index for July. This measure of service sector confidence is expected to fall from 57.1 in June to 55 in July. As was the case with the manufacturing index, service sector confidence staged an impressive recovery once reopening efforts began after hitting a low of 41.8 in April. This is another diffusion index, where values above 50 indicate expansion. So, even if estimates prove to be accurate, service sector confidence would still serve as a positive tailwind for business spending in July. Both manufacturer and service sector confidence benefited from reopening efforts in May and June; however, the July reports will give us an opportunity to see how business confidence has been affected by rising case counts throughout the month.
On Thursday, the weekly initial jobless claims report for the week ending August 1 is set to be released. Economists expect to see an additional 1.45 million initial claims filed during the week, which would mark the third straight week with increasing initial claims. As we’ve seen over the past two weeks, rising case counts and the slowdown of reopening efforts throughout the month have served as a headwind for further improvements to initial jobless claims. This headwind is expected to remain in place until the public health picture improves and reopening efforts can continue in earnest. Both initial and continuing unemployment claims remain high compared with historical averages, and we will continue to monitor these weekly releases until claims can return to more normal levels.
We’ll finish the week with Friday’s release of the July employment report. Economists expect to see 1.875 million jobs added during the month, following a better-than-expected 4.8 million jobs that were added in June. This would mark the third straight month with more than 1 million new jobs added, after anti-coronavirus measures in March and April devastated the labor market. The underlying data is also expected to show improvement, as the unemployment rate is expected to fall from 11.1 percent in June to 10.5 percent in July. While this would certainly be a welcome improvement, it would still leave the unemployment rate higher than at any point during the great financial crisis, highlighting the very real work that still needs to be done to get back to pre-pandemic employment levels.
That’s it for this week—thanks for reading and stay safe!
