US: Devastation and Redemption

Naturally, economic data continues to report horrendous new lows. And while I have struggled over the past few weeks to ferret out and present any positive news, it actually hasn’t been so hard this week.  The data is full of devastation but is also showing the emergence of redemption.

Retail sales fell -16.4% m/m in April, far worse than the already gruesome expectations of -12%.  The previous record before the past two months was -6.5%. After stripping out volatile components, the “control” group fell -15.5%, about three times as bad as expectations.  Losses were enormous across all major categories - numbers in the -20% range might be what you would expect to see in a very bad year, not in just one month. The lone exception was nonstore retailers, which is mostly e-commerce. Amazon and the like have apparently rescued consumers. However, we are quite likely to be through the worst of it. April was a total shutdown, May will be only a partial shutdown, and June will be a slow recovery, so as a result, we will probably see an increase in overall sales in the next report.

Industrial Production Data

Industrial production data goes back all the way to 1919, before the Great Depression, and of course in April 2020, over 100 years later, it set a record loss of -13.7% m/m. Declines were monumental across all manufacturing subsectors, but the motor vehicle industry, in particular, suffered horrible losses, losing -72% of production as states with major auto manufacturing factories were completely shut down. But again, we are almost certainly at the bottom since many of those factories will be reopening on Monday.

Weekly Jobless Claims

Weekly jobless claims continue to be an important source of fresh information.  Last week, 2,981,000 Americans filed for unemployment insurance, still over 8 times as much as the historical average. The good news is that ever since the peak on 3/28, claims have declined for six straight weeks. There is also good news when we look at the total number of workers who are continuing to receive benefits, not just the ones who made their initial claim last week. Continuing claims increased by the least amount since the trouble started, and it suggests that almost as many people are going back into the labor force as are leaving it.  Again this is because virtually every State is starting to “open up” to one degree or another and people are starting to go back to work.  For example, here in Maryland, our Governor is letting all manufacturing restart and allowing retail stores to open back up at 50% capacity. 

Manufacturing Survey

The New York Fed’s Empire State manufacturing survey fell a record amount to a record low of -78.2, easily surpassing the previous low of -34.3.  But the respondents of the survey still have a positive outlook on future new orders.  In addition, the respondents not only have a positive view of future general conditions but in fact that view actually improved in May. Manufacturers apparently feel the worst is over.

Small Business Optimism Survey

The National Federation of Independent Business (NFIB) Small Business Optimism survey fell from 96.4 to 90.9 and has fallen a total of -13.7 points since February, but it still remains higher than in the Great Recession. Moreover, the net percentage of respondents expecting to see an improvement in the economy in the next six months took a sharp 24% increase in April to the highest level in 19 months. Small businesses may have been battered, but like those in the Empire State survey, they clearly believe the worst is over.

Consumer Sentiment Survey

The University of Michigan’s Consumer Sentiment survey has fallen sharply since March, and both the overall index and the expectations component took a leg down again in May. But also in May, consumers’ assessments of the current situation actually rose – perhaps those direct payments and the extra $600/wk. in unemployment benefits put a smile on consumers’ faces.  Furthermore, note that all three parts of the survey remain well above the pessimistic lows of the great recession.

We may be through the worst since virtually everything was shut down in April, but virtually every state is now starting to open back up.  Several states, including Georgia and Colorado, started opening a few weeks ago.

That is not to say we won’t still see truly demoralizing declines in some reports.  For example, coming up we will be getting three reports on the housing market in addition to weekly jobless claims, and they will all be grim. The big employment report for May, which will be released soon, is also going to be gut-wrenching, easily sending the unemployment rate past the current 14.7%. Gross Domestic Product for Q2 will include April which was totally shut down, May which will have been mostly shut down, and June which will have experienced a slowly accelerating economy. So the Q2 GDP number is still likely to show -30% q/q annualized, and keep in mind we won’t even get that report until the end of July – that’s why we say it is so “backward-looking”. But in terms of actual economic activity, not reports, we may have in fact bottomed out. Almost every State is opening back up, consumers will be spending, and people will be going back to work. The next question is how fast will the economy recover, and how long will it take for all of those unemployed people to become employed again. Our scenario remains unchanged. We continue to expect a sharp recovery in Q3 and Q4, but it will take some time longer to get all of those jobs back.