The highlights of last week’s economic news were reports on trade, service sector confidence, and the jobs market. This week will be another busy one for updates, with releases scheduled on inflation, retail sales, industrial production, and consumer sentiment.
Last week’s news
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 $44.4 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 saw the release of the weekly U.S. initial jobless claims report for the week ending May 2. An additional 3.17 million initial unemployment claims were filed during the week, down from the upwardly revised 3.85 million initial claims from the prior week, but above estimates for an even 3 million. This result marks the fifth straight week of declining initial claims, which is a positive development. Still, the pace of initial claims remains well above normal. For reference, we averaged just under 220,000 initial claims a week in 2019, so the numbers from the last week of April are very concerning. This weekly update has been a widely followed report, as it provides a timely look at the status of the jobs market. This release was largely a preview for April’s full employment report.
Speaking of which, Friday brought us April’s employment report. As expected, it showed the devastating impact that widescale shelter-in-place orders had on the jobs market, with 20.5 million jobs lost during the month. This result was better than economist estimates for 22 million lost jobs, but previously released unemployment claims data indicates that this report may be undercounting the full extent of the damage. The underlying data was also weak, as the unemployment rate increased to a post-war high of 14.7 percent, against expectations for an increase to 16 percent. Furthermore, there’s evidence that misclassification of some workers kept the reported unemployment rate artificially low. Despite the better-than-expected results for headline job losses, April represents the worst single month for American job losses since the Second World War. This report brought the unemployment rate well above the 10 percent high seen during the great financial crisis. While we can hope that many of the job losses over the past two months were temporary, we cannot discount the truly devastating impact this report represents for tens of millions of Americans.
What to look forward to
On Tuesday, April’s Consumer Price Index will be released. Consumer prices are expected to fall by 0.7 percent during the month, following a 0.4 percent decline in March. On a year-over-year basis, consumer prices are expected to rise by a modest 0.4 percent, down notably from the 1.5 percent year-over-year growth rate the month before. Lowered gas prices are one of the major drivers of expectations for lowered inflation. Core consumer inflation, which strips out the impact of volatile gas and food prices, is expected to fall by only 0.2 percent during the month. This result would translate to year-over-year core consumer inflation of 1.7 percent, the lowest level seen since September 2017. In the short term, the negative shock to consumer demand created by efforts to battle the spread of the coronavirus is expected to continue to hold back inflationary pressure for consumers.
On Wednesday, April’s Producer Price Index will be released. Economists expect to see a 0.4 percent decline in headline producer inflation for the month, which would cause producer prices to decline by 0.2 percent on a year-over-year basis. As was the case with consumer inflation, core producer prices are expected to show a more modest decline of 0.1 percent in April, leading to 0.8 percent year-over-year inflation for this segment. If the estimates hold, year-over-year core producer inflation will hit its lowest level in more than four years. Despite the raft of supportive policy measures enacted by the Fed over the past two months, the collapse in global demand is expected to serve as a headwind to inflation in the short term.
On Thursday, the weekly U.S. initial jobless claims report for the week ending May 9 is set to be released. Economists anticipate an additional 2.5 million initial unemployment claims to be filed. Although this result would represent the sixth straight week of declining initial claims, it would bring the eight-week total up to roughly 36 million recently unemployed Americans. If estimates hold, this report would show that mass layoffs have continued into May. We will continue to monitor this weekly gauge of the health of the jobs market until we see levels approach historical norms.
Friday will see the release of April’s retail sales report. Sales are expected to fall by 11 percent during the month, following an 8.7 percent decline in March. To put this into perspective, the worst two back-to-back months for retail sales during the great financial crisis saw sales fall by a combined 6.7 percent. Part of this anticipated decline can be attributed to lowered spending on gas. But even core retail sales, which exclude volatile gas and auto purchases, are slated to decline by 5.5 percent in April. This result would mark the worst month on record for core retail sales, passing last month’s record 2.8 percent decline. Given the importance of consumer spending to the overall economy, if estimates prove to be accurate, April’s retail sales would be a negative signal for second-quarter GDP growth.
Friday will also see the release of the industrial production report for April. Economists expect production to fall by 11.4 percent during the month, following a disappointing 5.4 percent decline in March. The March report represented the worst monthly drop in output since 1946, so the prospect of a further decline is concerning. Much of the April forecast can be traced to low expectations for manufacturing output. This segment is set to fall by 14 percent during the month, after declining by 6.3 percent in March. Given the massive drop in global demand created by the ongoing pandemic, industrial production and manufacturing output are expected to remain challenged until the global economy shows signs of a recovery.
Finally, we’ll finish the week with Friday’s release of the first estimate of the University of Michigan consumer sentiment survey for May. This widely followed measure of consumer confidence is expected to decline from 71.8 in April to 67.5 in May. This result would not be surprising, given the fact that most Americans were still under shelter-in-place orders at the beginning of the month. Consumer confidence is typically supported by positive market performance and a strong jobs market. While markets have partially rebounded from recent lows, April’s employment report showcased the damage that efforts to combat the spread of the coronavirus have had on the jobs market. The extremely weak employment situation will likely serve as a headwind against further improvements to consumer confidence, unless large-scale progress is made in returning Americans to work. Consumer confidence will be a widely followed metric over the coming months. Hopes of a swift economic recovery largely rely on a rebound in consumer confidence and spending.
That’s it for this week—thanks for reading and stay safe!