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The economic data released last week came in largely worse than expected, highlighting the very real headwinds the economy is facing with the majority of the country effectively shut down. March’s retail sales and industrial production reports were two of the most disappointing releases, but the weakness was widespread. This week will again be packed with important reports, with highlights on housing sales, business and consumer sentiment, and business spending. We’ll also look closely at the weekly initial unemployment claims.
Last week’s news
On Wednesday, March’s retail sales report was released. Sales fell by 8.7 percent during the month, against economist estimates for an 8 percent decline. This result marked the worst monthly performance for headline sales on record, easily surpassing the previous record of a 3.9 percent decline in November 2008. The areas of decline were widespread, with clothing, furniture, auto, and restaurant spending representing some of the hardest-hit industries. Core retail sales, which strip out the impact of volatile auto and gas spending, fell by 4.5 percent, which was slightly less than the expected 5 percent drop. Control group sales, which exclude the same categories excluded by core sales, as well as spending at restaurants and on building materials, increased by 1.7 percent. This result, which beat expectations for a 2 percent decline, was largely driven by a surge in grocery spending. Despite the results for core and control group sales, many economists believe that sales will continue to fall in April. This expectation is predicated on the fact that most of the strict social distancing efforts across the U.S. went into effect in the second half of March and are continuing throughout April. Consumer spending accounts for roughly two-thirds of economic activity in the U.S., so the sharp drop in sales in March is very worrisome.
Wednesday also saw the release of March’s industrial production report. Production fell by 5.4 percent, marking the largest monthly decline since 1946. Manufacturing output was especially weak, falling by 6.3 percent against expectations for a 4.1 percent decline. The numbers for manufacturing output also represented the largest monthly decline since 1946. But, once again, the weakness was widespread, with every major industry experiencing a production decline in March. This report was the first real look at production figures after widespread anticoronavirus efforts went into place. The results show that the service sector isn’t alone in facing headwinds from the crisis. Looking forward, we can expect further weakness in industrial production and manufacturing output, given the accelerating nature of factory closures throughout March and into April.
The third major data release on Wednesday was the National Association of Home Builders Housing Market Index for April. This measure of home builder confidence fell from 72 in March to 30 in April, against calls for a smaller drop to 55. This result represents the worst monthly decline for home builder confidence in history, driving the index to a seven-year low. Home builders cited significant declines in prospective buyers and construction challenges due to anticoronavirus measures as two key factors causing sentiment to plunge. Home builder confidence had improved steadily throughout 2019 and the beginning of 2020, driven by low mortgage rates that spurred prospective buyers into the market. Accordingly, the start of the year saw growth in new construction. Going forward, April’s large decline in confidence is expected to slow this construction trend.
On Thursday, the release of March’s housing starts and building permits reports gave us our first look at the pandemic’s impact on new home construction. Housing starts fell by 22.3 percent during the month, surpassing estimates for an 18.7 percent decline. This result represents the worst monthly decline for housing starts since 1984. Nonetheless, the pace of new home construction sits at levels last seen in July 2019, largely due to the strong run-up in the second half of 2019. Permits held up a bit better than starts in March, falling 6.8 percent against expectations for a 10.7 percent decline. While these two reports can be quite volatile, future weakness should not be surprising as long as home builders remain pessimistic amid the ongoing crisis.
Finally, we finished the week with Thursday’s release of the U.S. initial jobless claims report for the week ending April 11. This report showed mass layoffs continuing well into April, with an additional 5.2 million Americans filing initial unemployment claims during the week. This figure is down from 6.6 million initial claims filed the week before and better than economist expectations for 5.5 million such claims. Despite this weekly result, the fact of the matter is that more than 22 million jobs were lost in a four-week period, which is unprecedented in American history. This massive shock to the formerly healthy job market has been a major driver of lowered confidence and market turbulence over the past month.
What to look forward to
On Tuesday, March’s existing home sales report will be released. Economists expect to see sales decline by 7.3 percent during the month, due to the headwinds created by efforts to contain the coronavirus. While this result would be disappointing, it would leave the pace of new sales slightly higher than it was in March 2019. Sales of existing homes fell throughout much of 2018 before rebounding impressively throughout much of 2019 and the start of 2020. If estimates hold, the March report would mark the ninth straight month with year-over-year growth in existing home sales. But March is likely to be the last month with year-over-year growth for the foreseeable future, given last year’s strength and the numerous headwinds the sector is facing.
On Thursday, the U.S. initial jobless claims for the week ending April 18 will be released. Economists expect an additional 4.5 million initial claims to have been filed during the week. If this estimate holds, the four-week total of new filers would exceed 23 million. While this figure is quite worrisome, a bit of a silver lining may exist in terms of the types of jobs lost (as discussed by my colleague Peter Essele in last week’s blog post). We will continue to monitor this weekly release until we get a sign that the pace of layoffs and dismissals has returned closer to levels seen before the crisis.
Thursday will also see the release of April’s IHS Markit Flash U.S. Composite Purchasing Managers’ Index reports. These surveys are expected to show a large monthly decline in business confidence for both the manufacturing and service sectors. Manufacturing confidence is anticipated to fall from 48.5 in March to 36 in April, while service sector confidence is set to drop from 39.8 to 31.3. These are diffusion indices, where values below 50 indicate contraction, so these results would be worrisome, especially given March’s weak results. If the estimates hold, the composite index, which combines manufacturer and service sector confidence, would sit at a level that typically indicates a 10 percent contraction to annual GDP. Business sentiment and investing were weak throughout much of 2019 before showing signs of recovery to start the year. Currently, given the understandably weak confidence figures in March and anticipation for continued weakness, indications are for business spending to remain constrained.
March’s new home sales report will be the third major data release on Thursday. New home sales are expected to fall by 15 percent during the month, following a 4.4 percent decline in February. Compared with existing home sales, new home sales are a smaller and more volatile portion of the overall housing market. Accordingly, weakness resulting from the coronavirus crisis is understandable. If the estimates hold, the March report would bring the pace of new home sales to its lowest level since May 2019. In coming months, we can once again expect weakness to continue due to the ongoing measures to combat the coronavirus and the changes to consumer spending resulting from the crisis.
On Friday, March’s preliminary durable goods orders report will be released. Orders are expected to fall by 12 percent during the month, following a better-than-expected 1.2 percent increase in February. Some of this anticipated decline can be attributed to a slowdown in volatile aircraft orders. But another factor may be an expected 5 percent decline in core durable goods orders, which strip out the impact of transportation orders. If the estimates hold, the March numbers would mark the largest single-month decline in core durable goods orders since January 2009. Then, core durable goods orders fell by 10.2 percent month-over-month in the middle of the global financial crisis. Core durable goods orders are often viewed as a proxy for business investment, so a decline would once again be a concern but not a surprise.
Finally, we’ll finish the week with Friday’s release of the second and final reading of the University of Michigan consumer sentiment survey for April. The preliminary report released earlier in the month showed consumer confidence falling from 89.1 in March to 71 in April, which was the largest single-month decline in the survey’s history. Economists expect the final report to show a further decline to 69, as efforts to combat the coronavirus and large-scale layoffs continue to weigh on consumers. Improved confidence typically supports faster spending growth, so further declines would be a bad sign for April’s consumer spending figures. Consumer sentiment will be an important area to monitor as we continue to combat the spread of the coronavirus. A fulfillment to our hope for a swift V-shaped economic recovery will likely hinge on consumers quickly regaining confidence and returning to spending levels seen before the crisis. Ultimately, if consumer confidence remains depressed throughout the year, spending will probably follow suit. Any signs of a rebound in confidence in the coming months would therefore be quite welcome.
That’s it for this week—thanks for reading and stay safe!
