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Last week continued to show the devastating effect that the pandemic had on the economy in April, with many of the updates focusing on weakness in the housing sector during the month. This will be a jam-packed week of economic reports, with updates scheduled that touch on wide swaths of the economy.
Last week’s news
We started the week with Monday’s release of the National Association of Home Builders Housing Market Index for May. This measure of home builder confidence increased from 30 in April to 37 in May, slightly better than expectations for an increase to 35. This increase follows a steep fall from 72 in March down to an eight-year low of 30 in April. So, the modest rebound we saw in May still leaves the index well below levels seen earlier this year. Home builders cited significant declines in prospective buyers and construction challenges due to measures to combat the spread of the coronavirus as two key factors causing sentiment to plunge in April, and this report showed that these headwinds persisted into the start of May. Low levels of home builder confidence are expected to slow the pace of new home construction.
Speaking of which, on Tuesday, April’s building permits and housing starts reports were released. These measures of new home construction showed sharp declines in April, with housing starts dropping by 30.2 percent against expectations for a 26 percent decrease. Building permits fell by 20.8 percent during the month, less than the 25.9 percent that was anticipated. This was the largest monthly percentage decline for housing starts since records began in 1959, and this worse-than-expected result brought the pace of new home construction to its lowest level since February 2015. These reports can be volatile on a month-to-month basis; however, the pandemic clearly hindered new home construction in March and April. Looking forward, given the continued low level of home builder confidence in May, the pace of new home construction is not expected to pick up meaningfully during the month.
On Wednesday, the minutes from the April Fed FOMC meeting were released. There were no major surprises contained within the release, but the report did highlight the concerns that many FOMC participants have of the possibility of additional waves of infection in the medium term. The Fed has committed to supporting the economy and markets through a range of policy tools, and this release showed its continued commitment to providing support. One thing that was notably not mentioned was the possibility of negative policy rates, which the Fed has continually stressed is not in its current plans, preferring to use alternative policy tools. Overall, this was a relatively benign release that largely reinforced what we already knew.
On Thursday, the weekly initial jobless claims report for the week ending May 16 was released. There were 2.438 million initial unemployment claims reportedly filed during the week, slightly higher than the 2.4 million that economists had forecast. This report comes with a large asterisk, however, as the Massachusetts labor department has come out and claimed that the national report dramatically overstated the number of initial claims filed in the state during the week. The national report showed 1.18 million initial claims in Massachusetts alone during the week, rather than the 115,952 that Massachusetts officials reported. This is the second week in a row where state-level data inconsistencies have led to overstated initial claims during the week. Connecticut’s initial claims were overstated for the week ending May 9, leading to the headline report being revised down by nearly 300,000 initial claims. Ultimately, while state data has been inconsistent, the trend for initial claims continues to show weekly improvement. But there is still quite a way to go before we start to approach historically normal levels.
We finished the week with Thursday’s release of April’s existing home sales report. Sales of existing homes fell by 17.8 percent during the month, slightly better than expectations for a 19.9 percent decline. Despite this better-than-expected result, this is still the largest monthly decline since July 2010, highlighting the pressure that lockdowns across the country during the month put on the housing market. This disappointing result broke a nine-month streak of year-over-year existing home sales growth. Home sales were one of the bright spots in the economic expansion in the second half of 2019 and the start of 2020. So, this sudden collapse is disappointing, but it is not surprising given the headwinds created by the pandemic during the month.
What to look forward to
We started the week with Tuesday’s release of the Conference Board Consumer Confidence Index for May. Confidence rose from a downwardly revised 85.7 in April to 86.6 in May. This result was slightly worse than expectations for an increase to 87, but it is still a step in the right direction. Confidence stabilizing as the country begins to reopen indicates that consumers are likely optimistic that the reopening efforts will be successful as we head into the summer. Consumer expectations for the future increased during the month; however, views of the present condition worsened modestly. Overall, this was a largely positive report, as it indicates that consumer confidence may have bottomed in April and could be set to rebound as states continue to reopen. This will continue to be a widely monitored data report, as hopes of a swift economic recovery largely rely on a quick rebound for consumer confidence and spending.
Tuesday also saw the release of April’s new home sales report. New home sales came in much better than expected, increasing modestly from a downwardly revised annual rate of 619,000 in March to 623,000 in April, against forecasts for a fall to 480,000. Despite this better-than-expected performance during the month, the pace of new home sales is still down notably from the recent high of 717,000 set in January. Last year saw strong growth in new home sales, and this momentum continued into the start of 2020 before the pandemic hit. Looking forward, the slowdown in new home construction in March and April will likely serve as a headwind for future new home sales due to lowered supply in key markets.
On Thursday, the second estimate of first-quarter GDP growth is set to be released. Economists expect to see the annualized growth rate for the quarter remain unchanged at -4.8 percent. Personal consumption, which was the major driver of GDP growth in 2019, is expected to improve slightly to a 7.4 percent annualized decline during the quarter, from an initial estimate of a 7.6 percent decline. Even if this anticipated improvement in consumption holds true, this would still represent the worst quarter for personal consumption since the second quarter of 1980. Although these very weak growth figures are concerning, they are likely just the tip of the iceberg, as economists are currently forecasting a 33.5 percent annualized contraction for the economy in the second quarter.
Thursday will also see the preliminary estimate of durable goods orders in April. Orders are set to decline by 18 percent in April following a 14.7 percent drop in March. In March, much of the drop in headline orders was due to a sharp decline in volatile aircraft orders; however, that is not expected to be the case in April. Core durable goods orders, which strip out the effect of volatile transportation orders, are expected to fall by 15 percent during the month, significantly worse than the modest 0.4 percent decline we saw in March. Core durable goods orders are often used as a proxy for business investment. So, if estimates hold, it would indicate that already weak business spending in the first quarter only worsened to start the second quarter.
The third major data release on Thursday will be the weekly initial jobless claims report for the week ending May 23. Economists currently expect 2 million additional Americans filed initial claims during the week. Depending on the revision to the prior week’s report due to the Massachusetts reporting error, this result may end up being a slight increase in initial filings during the week if estimates hold. As we’ve seen over the past two weeks, however, this data is certainly not perfect, and it’s important not to place too much emphasis on week-to-week changes. Rather, the focus should be on the general trend, which has been downward for the past seven weeks, indicating that the worst is likely behind us. We will continue to monitor this weekly update until we see sustained progress in getting weekly initial claims closer to historical levels.
On Friday, April’s personal income and personal spending reports are set to be released. Both of these reports are expected to show historically bad results for the month. Incomes are set to fall by 7 percent, while spending is expected to decline by 12.6 percent. If estimates prove to be accurate, this would be the worst month for both reports on record. While the sharp drop in spending is certainly concerning, the anticipated income decline is also worrisome, as it could hinder a return to faster spending growth as states begin to reopen. April’s retail sales report came in worse than expected, and a similar result for personal spending would serve to reemphasize the damage that the measures to combat the spread of the coronavirus had on the economy during the month.
Finally, we’ll finish the week with Friday’s release of the second and final estimate of the University of Michigan consumer sentiment survey for May. Economists expect to see the index remain unchanged at month-end, remaining in line with the midmonth estimate of 73.7. If this initial result holds, this would represent a slight improvement from April’s final reading of 71.8, driven by a noted improvement in the current conditions subindex, which rose from 74.3 in April to 83 at the start of May. As is the case with the Conference Board report on consumer confidence, this will be a widely followed release as it will give a glimpse into how consumers are reacting to the easing of shelter-in-place orders as we head into the summer.
That’s it for this week—thanks for reading and stay safe!
