The Independent Market Observer

Monday Update: Lowered Expectations Lead to Better-Than-Expected Results

Posted by Sam Millette

This entry was posted on Apr 27, 2020 10:39:49 AM

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In his Monday Update, Commonwealth’s Sam Millette dives into reports on GDP growth, personal spending and income, and the weekly initial jobless claims.The economic data released last week largely came in above forecasts, primarily due to very low expectations by economists rather than significantly better economic activity. This week will be another busy one. We’ll get our first look at first-quarter GDP growth, the personal spending and income reports for March, and the weekly initial jobless claims report. Updates on consumer and manufacturer confidence will also be highlighted.

Last week’s news

On Tuesday, March’s existing home sales report was released. Sales of existing homes fell by 8.5 percent during the month, a slightly better result than the 9 percent drop expected. The decline was due in large part to the social distancing policies initiated across the country around midmonth. Despite the monthly slump, year-over-year sales rose modestly. As such, March marked the ninth straight month of year-over-year growth in existing home sales. This streak is unlikely to hold next month, however. Going forward, further weakness in home sales is expected, given the steep drop-off in prospective home buyer foot traffic caused by the coronavirus.

On Thursday, the U.S. initial jobless claims report for the week ending April 18 was released. There were 4.4 million initial claims filed during the week, a lower number than the 4.5 million expected by economists. This report brought the five-week total up to more than 26.5 million new filers, a figure unprecedented in American history. California, Florida, and Texas bore the brunt of the damage during the week, with New York and Georgia following close behind. Given the continued mass layoffs in April, the unemployment rate is virtually guaranteed to hit double digits.  

Thursday also saw the release of April’s IHS Markit Flash U.S. Composite Purchasing Managers’ Index (PMI) reports. As a measure of business confidence, these surveys offered a first glimpse at how businesses are responding to the continued lockdown measures in April. Manufacturing confidence fell from 48.5 in March to 36.9 in April, against expectations for a larger decline to 35. The service sector was hit even harder, with confidence falling from 39.8 to 27, a worse result than the expected drop to 30. The composite index, which combines both manufacturer and service sector confidence, now sits at levels that have historically indicated a double-digit decline in GDP. With the sharp drops we’ve seen in business confidence in the face of the coronavirus crisis, business investment is not expected to be a major driver of economic growth in the short term.

The third major data release on Thursday was March’s new home sales report. New home sales fell by 15.4 percent during the month, a slightly better result than the expected 16.1 percent decline. This segment of the housing market is smaller and more volatile than existing home sales, so the larger decline is not surprising given the headwinds created by the coronavirus. This result brought the pace of new home sales to its lowest level since May 2019. Housing growth was a bright spot of the economic expansion during the second half of 2019 and into 2020, but the March declines in both existing and new home sales indicate that this sector’s best days may be behind us. An upswing would require that consumers regain confidence and return to more normal spending patterns.

On Friday, March’s preliminary durable goods orders report was released. Orders fell by 14.4 percent during the month, against expectations for a 12 percent decline. Much of this result can be attributed to a slowdown in commercial aircraft orders. Core durable goods orders, which strip out the impact of volatile transportation orders, held up much better than expected, falling by 0.2 percent against expectations for a 6.5 percent decline. This surprising resiliency for core durable goods orders indicates that business investment did not see the sharp contraction that was expected. Looking forward, however, core orders will likely continue to decrease, given the headwinds caused by the pandemic.

Finally, we finished the week with Friday’s release of the second and final reading of the University of Michigan consumer sentiment survey for April. Surprisingly, confidence improved slightly during the month, rising from an initial estimate of 71 at midmonth to 71.8 at month-end. Despite this slight uptick, the April reading represents a sharp drop from the level of 89.1 recorded in March. In fact, this result marks the worst monthly drop in the survey’s history, having driven the index to its lowest level since December 2011. Improved confidence typically supports faster spending growth, so April’s sharp decline in consumer sentiment is a bad sign for the month’s consumer spending figures.

What to look forward to

On Tuesday, the Conference Board Consumer Confidence Index for April is set to be released. Confidence is expected to plunge from a surprisingly strong 120 in March to 87.8 in April. This would bring the index to its lowest level since 2014, in an echo of the large decline we saw in the University of Michigan consumer sentiment survey last week. Looking forward, mass layoffs and continued shelter-in-place efforts around the country should continue to serve as a headwind against improvements to consumer confidence. As communities and businesses attempt to return to normal over the coming months, it will be important to monitor this index. Our hopes for a swift economic recovery largely rely on a sharp rebound in consumer confidence and spending.

On Wednesday, the first estimate of first-quarter GDP growth will be released. Economist forecasts are calling for a 3.7 percent annualized decline during the quarter, down from the 2.1 percent annualized growth achieved in the fourth quarter of 2019. Expectations for lowered consumer spending, the major driver of economic growth in 2019, are the basis for the negative forecast. Personal consumption, which increased by 1.8 percent on an annualized basis in the fourth quarter of 2019, is set to decline by 2.3 percent annualized during the first quarter. This figure would mark the worst result since the fourth quarter of 2008. Although these expectations are concerning, the real damage from the efforts to combat the coronavirus is expected to come in the second quarter. Economists are currently predicting a roughly 25 percent annualized decline in economic output in that time period.

Wednesday will also see the release of the FOMC rate decision from the Fed’s April meeting. The Fed had previously lowered the federal funds rate to zero, where it is expected to remain for the duration of the crisis. To provide accommodations to the market, the Fed will continue to use its other policy tools. Market participants will be focused on the language chosen by the Fed to discuss the April meeting. The press release will give us insights into the Fed’s views on the current economic environment; it might also supply hints regarding future measures to support the economy.

On Thursday, March’s personal income and personal spending reports are both set to be released. Personal income is expected to fall by 1.3 percent during the month, down from a 0.6 percent increase in February. Spending is set to fall even further, with forecasts calling for a 4.2 percent decline. Accordingly, March would mark the worst single month for spending growth on record, far surpassing the previous record of a 1.4 percent slump in November 2008. The estimate is due in large part to a sharp drop in consumer spending on services such as airlines and restaurants, both of which saw activity virtually stop by midmonth. Again, while the anticipated March figures are bad, the real damage is expected to show up in April.

Thursday will also see the release of the weekly U.S. initial jobless claims report for the week ending April 25. Economists expect to see an additional 3.5 million initial claims filed during the week, down from the roughly 4.4 million filed the previous week. Nonetheless, if estimates hold, the six-week total would rise to roughly 30 million newly unemployed Americans. While the peak in initial jobless claims is likely past for the time being, we will continue to monitor this weekly report to see how quickly the levels of weekly initial claims approaches normal.

Finally, we’ll finish the week with Friday’s release of the April ISM Manufacturing index. This measure of manufacturer confidence is expected to decline from 49.1 in March to 36.7 in April. This result would put the index roughly in line with levels last seen during the great financial crisis, during which confidence bottomed out at 34.5 in December 2008. It would also echo the results from the IHS Markit Flash PMI survey released last week. The ISM Manufacturing index is a diffusion index, where values below 50 indicate contraction. A decline in April would serve as another example of how hard hit the manufacturing industry has been by government policies to combat the coronavirus.

That’s it for this week—thanks for reading and stay safe!

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