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The economic updates released last week came in generally better than expected. Business confidence remained surprisingly resilient, while employment figures, despite being very weak, did not reflect recent layoffs. This week will again be packed with economic updates, including reports on inflation, consumer confidence, and weekly initial jobless claims.
Last week’s news
On Tuesday, the Conference Board Consumer Confidence Index for March was released. Consumer confidence fell from an upwardly revised 132.6 in February to 120 in March. This result, which beat expectations for a decline to 110, brought the index to its lowest level since July 2017. The subindex measuring consumer concerns about the future cratered from 108.1 in February to 88.2 in March. The measure of current conditions experienced a much smaller decline, from 169.3 in February to 167.7 in March. The surprising strength in the present situation index indicates that there is still plenty of room for this headline figure to fall in upcoming months. A decline in this indicator is expected, as it begins to better reflect the new economic reality.
Wednesday saw the release of the ISM Manufacturing index for March. This measure of manufacturer confidence beat expectations, falling from 50.1 in February to 49.1 in March, against forecasts for a drop to 44.5. This is a diffusion index, where values above 50 indicate expansion and values below 50 indicate contraction. This result left the index above the recent low-water mark of 47.8 that we saw in December 2019. Despite the better-than-anticipated result for March, the underlying data was reason for concern. The numbers demonstrated slower-than-normal deliveries, typically a sign of booming demand, which in this case reflected supply chain problems. In addition, the subindex that measures new orders fell from 49.8 to 42.2, suggesting that demand is swiftly drying up. Business confidence will be an important area to monitor going forward. Sharp drops in confidence will likely indicate that business investment will remain weak for the foreseeable future.
On Thursday, the weekly U.S. initial jobless claims report for the week ending March 28 was released. More than 6.6 million Americans filed initial unemployment claims during the week, breaking the record of 3.3 million set the previous week. The new record far surpassed economist estimates of 3.7 million initial filers. The two-week total of roughly 10 million new filers is an all-time high and represents an unprecedented shock to the economy. The past two reports clearly show that the pace of employee layoffs or dismissals increased in the second half of March, as business owners came to grips with the economic reality of widespread shelter-in-place and social distancing orders. This weekly report should be closely monitored going forward. It provides a relatively up-to-date look into the health of the jobs market during this period of massive disruption.
Thursday also saw the release of the February international trade report. The trade deficit narrowed by slightly more than expected during the month, falling from $45.5 billion in January to $39.9 billion in February. Expectations were for a move to $40 billion. This result brought the trade deficit to its smallest monthly level in more than three years. A decline of 0.4 percent in exports was more than offset by a 2.5 percent drop in imports during February. The deficit in trade of goods between the U.S. and China during the month fell to its smallest level since 2009, which largely reflects the widespread shutdown of the Chinese economy. Looking forward, given falling global demand, global trade volumes are expected to decline sharply.
On Friday, March’s employment report was released. Jobs lost during the month numbered 701,000, which was significantly higher than the decline of 100,000 forecast by economists. This result marks the first month with net job loss since 2010, breaking an extraordinary streak of monthly job gains over that period. The unemployment rate increased to 4.4 percent, up from 3.5 percent in February. This grim report was made worse by the fact that it undercounts the true damage done to the economy during the month. This report covered only the first two weeks of March, and we saw the pace of layoffs increased dramatically during the second half of the month. April’s employment report is expected to show significantly more job losses and a climbing unemployment rate. Some economists are forecasting a double-digit unemployment rate by April.
Finally, we finished the week with Friday’s release of the ISM Nonmanufacturing index for March. This measure of service sector confidence fell from 57.3 in February to 52.5 in March, which beat expectations for a drop to 43. As was the case with the manufacturing index, this is a diffusion index, where values above 50 indicate expansion. Accordingly, this result demonstrated surprising resilience from the service sector during the month. Still, despite the better-than-anticipated result for both manufacturer and service sector indices in March, future surveys are expected to show significantly lower confidence levels. Businesses will be coping with the massive drop in consumer demand created by the government measures to combat the spread of the coronavirus.
What to look forward to
Wednesday will see the release of the FOMC minutes from the Fed’s emergency meetings on March 3 and March 15. The minutes will provide a look into the Fed’s rationale for cutting the federal funds rate to effectively zero through two surprise rate cuts earlier in the month. The commentary is expected to be slightly dated, given the rapidly escalating situation and subsequent Fed actions to support the markets. The Fed announced a suite of quantitative easing measures in the weeks following its March 15 meeting. It will be interesting to see if alternative measures were discussed at the March meetings that haven’t yet been used. Based on the scope and timing of its actions in March, the Fed is clearly committed to supporting the financial system though this crisis. The FOMC minutes may give us a hint as to what additional stimulus by the Fed may look like.
On Thursday, the Producer Price Index for March will be released. Economists expect to see headline inflation decline by 0.3 percent during the month, largely due to lowered gas prices. This result would bring year-over-year headline producer inflation down to 0.5 percent, marking its lowest level since 2016. Core producer prices, which strip out the impact of volatile energy and gas prices, are expected to remain flat for the month. This result would translate to modest 1.2 percent year-over-year core producer inflation. Producer inflation fell throughout much of 2019. Low producer price pressure is expected to continue in the short term, due to the collapse in global demand during the current crisis.
Thursday will also see the release of the weekly U.S. initial jobless claims report for the week ending April 4. Economists expect 5 million more Americans to file initial unemployment claims for the week, following two weeks during which roughly 10 million Americans filed new claims. The past two reports clearly showed the economic headwinds created by the measures to combat the spread of the coronavirus. The recent surge in initial jobless claims is unprecedented in U.S. history. This weekly report will continue to be a closely monitored gauge of the job market, given its relatively up-to-date issuance.
The third major release on Thursday will be the preliminary estimate of the University of Michigan consumer sentiment survey for April. Economists are calling for a steep drop from 89.1 in March to 80 in April. This result would bring the index down to its lowest level since 2013, as consumers are coming to grips with the new economic reality in a country largely locked down. Historically, a strong jobs market and appreciating stock markets tend to support higher consumer confidence levels. So, given the economic climate, there is little hope for an immediate turnaround. High confidence levels typically support additional spending growth, so a decline would bode poorly for April’s consumer spending figures.
Finally, we’ll finish the week with Friday’s release of the Consumer Price Index for March. As was the case with producer prices, economists expect to see a 0.3 percent decline in headline consumer prices, driven by falling gas prices. Core consumer inflation, which strips out energy and food prices, is set to increase by a modest 0.1 percent during the month. On a year-over-year basis, headline consumer inflation is forecast to increase by 1.6 percent, while core prices should increase by 2.3 percent. Inflation remained well constrained in 2019, despite three rate cuts from the Fed during the year. Given the massive disruption to the jobs market over the past month and the Fed’s stated desire to let inflation run above its 2 percent target if necessary, the Fed would be unlikely to raise rates in the short term even if inflation accelerates.
That’s it for this week—thanks for reading and stay safe!
