A look behind at the March 2 week has a clear demarcation between information gathered before the coronavirus outbreak was spreading in the US and after it was evident that known cases were no longer isolated and contained. An otherwise upbeat February jobs report was largely relegated to a picture of conditions prior to the developing situation. The Fed’s Beige Book that covered essentially early January to late February bridged some of the gap between the most recent data and what is happening now. The FOMC’s decision to respond to financial market worries about the impact of the disease on the economy was more of a real-time response. So was the quick passage and signing of $8.3 billion in emergency funding to fight the outbreak. Perhaps the best take-away from the week is that the fundamentals of the US economy are solid enough to weather the crisis. Growth in the first quarter had already had a few negatives like the bottlenecks in the supply chain of goods form China. However, even a weak first quarter does not mean that growth will be entirely absent. There are some positives that may mean that consumer spending will once more keep the expansion on track in spite of challenges elsewhere. Low interest rates and job security are likely to ensure that consumers continue spending.
The Employment Situation for February showed 2020 is off to a strong start with payroll growth of 273,00 in both February and January, a resurgence in hiring back to the sorts of readings seen in 2018 before the ebbing in global growth sapped some activity late that year and worries about a possible recession emerged in 2019 that have since faded. The unemployment rate dipped a tenth to 3.5% and remained near 50-year lows. However, the data was gathered before COVID-19 began severely rattling equity markets and confirmed cases were more widespread. The March numbers were unlikely to match the heft gains of the prior two months and some sectors may be newly reluctant to hire in case of a substantive downward turn in the economy.
Challenger data on layoff intentions in February was mostly about sectoral restructuring for retail and technology. There was no obvious sign that measures to prevent the spread of the coronavirus were leading to layoffs – yet. March could be a different story. However, businesses are seeing such a dearth of qualified workers that it may take a longer and/or deeper impact before layoffs occur in any significant numbers. Ultimately it would be more costly to layoff and lose an experienced worker than to keep him/her on payroll until the situation blows over.
The ADP National Employment Report for February showed private payrolls rose 183,000, less than the 228,000 in the government data. This actually wasn’t all that much slower than the revised ADP number for January of 209,000. But it may indicate that hiring was a bit more cautious in February.
Initial jobless claims remained on trend in the February 29 week with a small 3,000 decline to 216,000. So far, the weekly numbers are still those of a tight labor market. The insured rate of unemployment for the February 22 week held at 1.2% where it has been with almost no change since May 2018.
The mild – and quite probably brief – uptick in manufacturing activity in January and February could give way to contraction again in March. The ISM Manufacturing Index was 50.1 in February, down from 50.9 in January and the only two expansionary readings since July 2019. Expansion was narrow and tenuous in February. If new orders do not revive in March, the factory sector is going to slip back below the 50-mark due to disease-related disruptions.
The service sector has actually gained upward momentum in the past four months. That may be lost in March. In the meantime, the ISM Non-Manufacturing Index for February rose to 57.3, its highest since February 2019 when activity started to revive after the partial federal government shutdown ended.
New orders for all factory goods in January felt the pinch of a fall off in defense orders, but otherwise orders for durables were not that bad. Overall factory orders were down 0.5% from the prior month with durables down 0.2%. Durables excluding transportation ere up 0.8%. Transportation was down 2.1%, mainly on a 19.6% decline for defense aircraft. Nondurables orders were down 0.8% in large part because of sharp drops in petroleum prices.
Services have not seen the same intensity of challenges in the past year related to uncertain trade policy and were quick to benefit from the modest revival in the global economy before the coronavirus made its appearance. It may lose some ground, but not dip into a sectoral recession the way that manufacturing has.
Sales of motor vehicles in February were little changed from January, slipping to 16.8 million units (SAAR) from 16.9 million units. The light trucks category held on to its record 75% share of all units sold as consumers exercised their preference for the more versatile – and pricier – vehicles. Cost of ownership is more affordable while gasoline prices remain low and appear set to fall further. Purchases of cars and trucks could boost spending on durable goods and make a solid positive contribution to first quarter GDP. Sales of heavy trucks as a business investment, however, are soft and won’t add much to that component of GDP.
January data on international trade in goods and services suggested that net exports may be less of a drag in the first quarter but given the situation with unsettled trade conditions during the pandemic, this is could look very different in February and March. Imports are likely to slow significantly, but then idled business activity in other countries may mean they won’t need of goods from the US and exports could be down as well. Early indications are that the change in private inventories will be a negative as businesses exercise caution in uncertain conditions.
GDP estimates for the first quarter 2020 are not consistent. As of March 6, the St. Louis Fed’s Real GDP Nowcast is at 2.05%, the Atlanta Fed’s GDPNow is at 3.10%, and the New York Fed staff’s Nowcast is at 1.71%. The average of the three is 2.29%. These numbers can change rapidly as more data becomes available.
Disclaimer: Whetstone Analysis provides commentary as a service to its subscribers. Whetstone Analysis is not responsible for, and expressly disclaims all liability for, damages of any kind arising out of use, reference to, or reliance on any information contained within the site. While the information contained within the site is periodically updated and every effort is made to ensure its accuracy, no guarantee is given that the information provided in this Web site is correct, complete, and up-to-date. Click here to read our full Disclaimer.