Last week’s economic updates were mixed. Some reports focusing solely on February showed a steadily growing economy, while more recent updates reflected the negative effect of the government measures taken during March to combat the spread of the coronavirus. This week will give us a chance to see just how concerned consumers and businesses are, based on the confidence updates set to be released for these sectors. We’ll get multiple looks at the current employment situation, with Thursday’s release of the weekly initial unemployment claims and Friday’s release of the March employment report.
Last week’s news
We started the week with Tuesday’s release of the preliminary Markit U.S. Manufacturing and Services Purchasing Managers’ Index reports. These two measures of nationwide business sentiment reflected survey responses taken in March, giving us a relatively up-to-date view on businesses’ initial response to expanded government efforts to combat the public health crisis. Manufacturing confidence fell from 50.7 in February to 49.2 in March, which beat expectations for a drop to 43.5. Service sector confidence fared much worse, falling from 49.4 in February to 39.1 in March, against predictions for a drop to 42. This result was very disappointing, as the service sector accounts for the lion’s share of economic activity. The decline in both the manufacturing and service sectors brought the composite index down from 49.6 to 40.5. These are diffusion indices, where values above 50 indicate expansion and values below indicate contraction. The large declines, while disappointing, are not necessarily surprising given the massive disruptions to the economy. Increased business confidence tends to support spending growth, so these results will likely serve as a headwind for already weak business spending levels.
On Tuesday, February’s new home sales report was released. Sales fell by 4.4 percent during the month; however, this result is solely due to January’s report being revised from 764,000 sales up to 800,000. Without that revision, February’s pace of new home sales, at 765,000, would have represented the best reading for the index since 2007. Although new home sales can be volatile on a monthly basis, we saw a notable uptick in this indicator throughout 2019. And, to start the year, strong results in January and February showed that the housing market continued to excel. This positive trend was supported by high levels of consumer confidence and low mortgage rates. Looking forward, however, a slowdown in housing growth is expected.
Wednesday saw the release of the preliminary estimate of February’s durable goods orders report. Orders increased by 1.2 percent, against expectations for a 0.9 percent decline. This result was due to a large increase in transportation orders. Core orders, which strip out the impact of that volatile segment, declined by 0.6 percent during the month, against an expected 0.4 percent drop. Core durable goods orders are often used as a proxy for business investment, so this decline in February is cause for concern. Businesses seem to have been pulling back on spending even before the full brunt of the coronavirus pandemic was made clear. Business investment was weak throughout 2019, but there were signs of hope in January, when improved sentiment and new orders pointed toward a turnaround. Now, however, business spending seems likely to remain weak for the foreseeable future.
On Thursday, the weekly U.S. initial jobless claims report for the week ending March 21 was released. The 3,283,000 initial claims for unemployment filed during the week far exceeded both the 1,700,000 forecast by economists and the 281,000 initial claims that were filed the week before. This number represents by far the largest single-week increase in unemployment claims in history, with the second-highest week coming in at just under 700,000 in 1982. The jobless picture may be even bleaker than the current release suggests, as reports indicated that technical difficulties and overrun field offices prevented some of the newly unemployed from claiming benefits. For many Americans, the jobless claims report was one of the first indicators that truly demonstrated the scale of the economic damage created by the coronavirus pandemic. Brad wrote about this topic in more detail in his post on March 26.
February’s personal income and personal spending reports were released on Friday. They showed continued steady growth in February, with income and spending rising by 0.6 percent and 0.2 percent, respectively. Personal income came in well above estimates for 0.4 percent growth, while spending was in line with expectations. These solid results showed that consumers were on good footing to start the year. Still, the numbers are not necessarily as encouraging as they might be, given the significant headwinds personal income and spending will face in coming months. Consumer spending was the major driver of economic growth last year, so this sector will need to be monitored going forward.
Finally, we finished the week with Friday’s release of the second and final reading of the University of Michigan consumer sentiment survey for March. Sentiment fell dramatically from 95.9 at midmonth to 89.1 at month-end, against an anticipated decline to 90. On a month-to-month basis, the drop from 101 in February to 89.1 in March marks the largest monthly decline since October 2008. Clearly, consumers felt the effect of the government actions taken in March to combat the spread of disease. Sentiment now sits at its lowest level since October 2016. Friday’s result more than offsets the improvements to sentiment that followed the elections in November 2016. High levels of consumer confidence traditionally support faster spending levels, so this sharp decline bodes poorly for future consumer spending reports.
What to look forward to
On Tuesday, the Conference Board Consumer Confidence Index for March is set to be released. Confidence is expected to fall from 130.7 in February to 114 in March, demonstrating that measures to halt the spread of the coronavirus are weighing heavily on consumers. The anticipated result would bring the index down to its lowest level in more than three years. As we saw with the University of Michigan survey last week, there is potential ahead for even steeper declines in consumer confidence given the rapidly escalating economic situation.
Tuesday will also see the release of the February international trade report. The trade deficit is expected to narrow from $45.3 billion in January to $39.5 billion in February. If estimates hold, this result would leave the trade deficit at its smallest gap since September 2016. A previously released trade report showed a modest increase in exports and a large decline in imports during February, which is expected to drive the overall narrowing of the trade deficit. Looking forward, both imports and exports are likely to drop sharply, given falling global demand in the face of the coronavirus pandemic.
Wednesday will see the release of the ISM Manufacturing index, which is set to decline sharply from 50.1 in February to 46 in March. This is a diffusion index, where values above 50 indicate expansion and values below 50 indicate contraction, so this anticipated decline is worth monitoring. Manufacturer confidence fell steadily throughout 2019, as the trade war with China caused uncertainty that damaged manufacturer confidence. In January, however, this index was able to recover into expansionary territory to start off the year, so this swift decline below 50 is especially disappointing.
On Thursday, the weekly U.S. initial jobless claims report for the week ending March 28 will be released. Economists expect that 2,500,000 more unemployment claims will be filed during the week, following the unexpectedly high number of 3,283,000 claims made during the previous week. These reports would easily represent the largest two-week employment swing in U.S. history, demonstrating the unprecedented economic disruption in the second half of the month. The initial jobless claims report should be closely followed for the immediate future. It gives a relatively up-to-date look at one of the primary economic costs associated with widespread measures to combat the public health crisis.
On Friday, March’s employment report will be released. Economists are forecasting a decline of 100,000 jobs in March. If the estimates hold, March would be the first month with net job losses since September 2010. Also, it’s likely that this estimate undercounts the true employment situation during the month. As the survey was conducted during the second week of March, it does not capture the massive spike in unemployment claims in the third week of the month, as well as the anticipated jump in the fourth week. The underlying data is also expected to show weakness, with the unemployment rate set to increase from 3.5 percent to 3.8 percent. The job market showed some weakness to start off 2019, but it recovered in the fourth quarter and during the first two months of 2020. Accordingly, this anticipated decline is disappointing but not surprising.
Finally, we’ll finish the week with Friday’s release of the ISM Nonmanufacturing index for March. This measure of service sector confidence is expected to fall from 57.3 in February to 48 in March. Business owners have been contending with the headwinds created by social distancing and shelter-in-place orders that have swept the country. The March result would be in line with the large drop in the Markit U.S. Manufacturing and Services Purchasing Managers’ Index reports released last week. As was the case with the ISM Manufacturing index, this is a diffusion index where values below 50 indicate contraction, so the anticipated decline is worrisome. If the estimate holds, the index would sit at its lowest level since July 2009. Given the massive disruptions to businesses we experienced during the month, this result makes sense.
That’s it for this week—thanks for reading and stay safe!