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Last week saw the release of several important economic updates, with the initial look at economic growth in the first quarter drawing much of the attention. The pace of reports this week will be slower, but the release of April’s employment report on Friday will be closely monitored.
Last week’s news
On Tuesday, the Conference Board Consumer Confidence Index for April was released. Confidence declined from a downwardly revised 118.8 in March to 86.9 in April. This drop, which was worse than the expected decline to 87, represents the worst monthly decline since oil was embargoed in 1973. This disappointing but unsurprising result brought the index to its lowest level since 2014. The decline in headline confidence was caused by a sharp drop-off in the subindex for the present situation, which fell from 166.7 in March to 76.4 in April. Given the unprecedented number of layoffs over the past two months, and the continued efforts to combat the spread of the coronavirus, weak confidence is expected going forward. This report bears watching, as hopes for a speedy V-shaped recovery will likely hinge on a swift rebound in consumer confidence and spending figures.
On Wednesday, the first estimate of first-quarter GDP growth was released. The economy declined by 4.8 percent annualized during the quarter, against estimates for a 4 percent annualized contraction. Personal consumption, which was the major driver of economic growth last year, declined by 7.6 percent annualized during the quarter, far below the estimates for a 3.6 percent annualized drop. This result marks the worst quarter for personal spending growth since the second quarter of 1980. Although these very weak growth figures are concerning, they are likely just the tip of the iceberg. Economists are currently forecasting a 25.8 percent annualized contraction for the economy in the second quarter.
Wednesday also saw the release of the FOMC rate decision from the Fed’s April meeting. In March, the Fed lowered the range of the federal funds rate to effectively zero, and this position was reiterated. Rates will remain low for the foreseeable future. Fed Chairman Jerome Powell used his press conference to reassure market participants that the Fed is ready and able to continue to support markets and the economy during these uncertain times. The Fed has already unleashed a slew of supportive actions for the economy that goes above and beyond the response to the great financial crisis, so this continued commitment was received as a positive development, even though it was widely expected.
On Thursday, March’s personal income and personal spending reports were released. Personal income fell by 2 percent during the month, against expectations for a 1.7 percent decline. Spending fell even further, dropping 7.5 percent during the month, against expectations for a 5.1 percent decline. March was the worst single month for spending growth on record, far surpassing the previous monthly record of a 1.4 percent decline set in November 2008. While these figures are bad, they are likely just a precursor for terrible results in April, as the widespread shelter-in-place orders did not take effect until the second half of March. The March income and spending reports are also a bad sign for overall economic growth in the second quarter.
Thursday also saw the release of the weekly U.S. initial jobless claims report for the week ending April 25. During the week, 3.84 million initial claims were filed, bringing the six-week total of the recently unemployed to more than 30 million. This number is worse than the 3.5 million initial claims expected by economists, but down from the 4.44 million initial claims the week before. We have now seen five straight weeks of weekly declines in initial claims, which is certainly encouraging. Still, the fact remains that huge swaths of the American workforce have been massively disrupted by the efforts to contain the spread of the coronavirus.
Finally, we finished the week with Friday’s release of the April ISM Manufacturing index. This measure of manufacturer confidence fell from 49.1 in March to 41.5 in April, a better result than the expected fall to 36. This is a diffusion index, where values below 50 indicate contraction, so the current level of 41.5 is quite concerning. The manufacturing industry has been hard-hit by factory closings and lowered global demand due to the coronavirus. While factories may be able to reopen in the coming months, the drop in demand is likely to linger, serving as a headwind against a swift recovery for manufacturers.
What to look forward to
We started the week with Tuesday morning’s release of the international trade report for March. The trade gap widened during the month, from a revised three-year low of $39.8 billion in February to $44.2 billion in March. This brought the monthly trade deficit close to the $45.5 billion level that we saw in January. China’s decision to open factories back up in March after shutting many of them down in February did not have as large of an impact on overall trade volumes as expected. Rather, the large widening in the trade deficit was primarily driven by a sharp drop in exports that more than offset a smaller decline in imports during the month. Looking forward, both imports and exports are expected to fall even further in April, driven by the slowdown in global demand in the face of the coronavirus pandemic.
The ISM Nonmanufacturing index was also released on Tuesday morning. This measure of service sector confidence fell by less than expected, declining from 52.5 in March to 41.8 in April, against expectations for a larger fall to 38. Despite the better-than-expected result, the index dropped to its lowest level in more than a decade. Service sector confidence now sits near the all-time low of 37.8 set in November 2008. This is a diffusion index, where values below 50 indicate contraction. Accordingly, this anticipated drop is concerning, although not necessarily surprising given the shutdowns to most businesses during the month. Going forward, the declines we saw in business confidence during the month are a bad sign for future business investment, which was already weak heading into 2020.
Thursday will see the release of the weekly U.S. initial jobless claims report for the week ending May 2. Economists expect to see an additional 3 million initial claims filed during the week, down from the 3.84 million claims we saw the week before. Despite this anticipated decline, if estimates hold, the seven-week total would rise to more than 33 million newly unemployed Americans—an unprecedented amount. While we are likely past the peak for initial jobless claims, we will continue to monitor this weekly report. It’s important to track how quickly we can get back to normal levels of weekly initial claims, which averaged just under 220,000 claims per week in 2019.
Finally, all eyes will be on Friday’s release of April’s employment report. While March’s report gave a preview of the damage that the wide-scale shelter-in-place orders are having on the job market, April’s results will give a more complete picture of the impact. Economists are currently estimating that 22 million jobs were lost during the month, which would send the unemployment rate skyrocketing to 16 percent. This figure would be well above the high-water mark of unemployment at 10 percent that we saw during the peak of the great financial crisis. Average hours worked is expected to decline to levels last seen in 2010. Given the fact that more than 30 million Americans filed initial unemployment claims in the past six weeks, this report will be a very bleak snapshot of the overall health of the jobs market. We can, however, hope that many of the lost jobs will be regained once shelter-in-place orders are lifted and state economies begin to open back up.
That’s it for this week—thanks for reading and stay safe!
