A look behind at the March 23 week continues the dizzying round of announcements out of central banks as they acted to ensure ample liquidity to credit markets. Fiscal authorities were also active in shaping relief packages to assist businesses and individuals over the immediate dislocations related to closures to get ahead of the spread of COVID-19. The $2 trillion in aid will find many hoping for the money to arrive sooner rather than later.
The import of most of the economic data was dwarfed by the explosion in initial jobless claims for the week ended March 21. Unadjusted claims rose nearly 3 million in the week, an unprecedented one-week surge. Given that claims data is based on actual head counts and is coincident with what is going on, it is solid evidence of the severity of the conditions facing workers and businesses. The number of people filing for benefits may drop considerably in the next week or two, but it will still be exceptional levels of applications.
Signs of rapid deceleration were visible for both the manufacturing and service sectors where new orders/revenues were down sharply.
The regional data on manufacturing from the Richmond Fed wasn’t nearly as bad as expected for March, but the one month of narrow expansion isn’t likely to hold up. Orders were flat for the Richmond report and order backlogs are falling. While shipments were strong, these were for past orders with little in the pipeline to keep activity going. The manufacturing conditions in the Kansas City District contracted sharply on reports of widespread order cancellations and no fresh orders, and lower oil prices.
The early numbers for service sector activity in March out of the Philadelphia, Richmond, and Kansas City Feds all showed that conditions had rapidly declined into deep contraction. In addition to the numbers out of New York in the prior week, there’s every reason to expect that the nearly 10 years of expansion for non-manufacturing is done. Steep declines in orders and revenues led to an end to hiring new workers and upward pressure on wages and benefits.
The final University of Michigan Consumer Sentiment Index for March showed consumers were significantly less optimistic than in the prior month with the index down to 89.1 after 101.0 in February. The report said the 11.9 point drop was the fourth largest on record. While the level isn’t that bad in the historical context, prolonged business closures and social distancing directives won’t improve confidence into April. Consumers remained relatively positive about current conditions (103.7 after 114.8) but the six months expectations – which account for about 60% of the index – fell sharply (79.7 after 92.1). These readings are consistent with worries about a recession and loss of jobs and income.
The Atlanta Fed/Chicago Booth/Stanford Survey of Business Uncertainty for March reported that its uncertainty index was at a record high and its expectations index at a record low. This reinforces what is known about business and consumer confidence in the face of the spread of COVID-19.
The remaining reports were for February and prior, and however solid, have to be read in the context of more recent developments.
The third and final estimate of fourth quarter GDP was an unrevised 2.1% on robust consumer spending. While data for January and into February were consistent with some momentum going into the first quarter 2020, March is likely to dissipate a lot of that.
Personal income in February was up 0.6% for a second month in a row with wages and salaries up 0.5% for two months straight. Consumption expenditures were a lackluster up 0.2% for February, but that was restrained by a decline in nondurables due to falling gasoline prices and durables on a dip in motor vehicle sales. March is likely to see a halt to increases in income, but maybe not to some categories of spending as consumers stocked up on pantry staples and emergency goods to prepare for quarantines. The PCE deflator for February was up 1.8% both for the total and core readings year-over-year. In normal circumstance, this would be good news for Fed policymakers who have been anticipating a rise back towards the 2% symmetric objective. However, the crisis is going to make price stability harder to achieve.
New orders for durable goods in February surprised to the upside with a 1.2% increase. However, that was mostly due to an increase in transportation of 4.6% where motor vehicle orders were up. Excluding transportation, orders were down 0.6%. The halt in new orders in the manufacturing surveys points to a weak month for March. Transportation orders are not going to be much help in the near future with aircraft orders drying up and lack of purchases of motor vehicles by individuals and businesses.
Sales of single-family homes were down a bit in February to 765,000 but only after a strong 800,000 in January. Low mortgage rates and fresh supplies of new residential construction kept consumers in the housing market in February. However, even consumers with reasonably good job security are going to hesitate to commit to a home purchase in March, and lenders are going to be averse to issuing mortgages to any except the most qualified buyers.
The FHFA House Price Index was for January. While it reflected the modest but steady pace of increases in prices for home resales and refinancings at the start of the year, in the numbers two months for now it may be clearer that it is once more a buyers’ market.
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