A look forward at the April 13 week will reveal how the end of the first quarter 2020 is shaping up – or perhaps it is more accurate to say shaping down – and that second quarter is off to a weak start.
Aside from the hard data in the week, I would look at the release of the next edition of the Fed’s Beige Book at 14:00 ET on Wednesday as of particular importance. At the March 15 FOMC meeting, policymakers had to rely heavily on anecdotal evidence about conditions. Although there have been a number of data reports that are bringing the situation into focus, input from business contacts across the 12 Districts is invaluable, particularly was the situation develops. The Beige Book correlates strongly to turns in the US economy. It doesn’t indicate size or duration of a downturn but it does coincide closely with the start of one. I would look for a rapid deceleration in economic activity in all Districts that will range from flat to outright contraction.
Second in importance in the week will be the March numbers on retail and food sales at 8:30 ET on Wednesday. Some retail outlets probably performed well as consumers stocked up on emergency supplies and pantry staples. However, spending elsewhere will be weak. Sales of motor vehicles plunged in March from February. Purchases of gasoline were sharply reduced both in dollar volume and dollars per gallon. Building materials and gardening supplies may have benefited from consumers being forced to be at home during the early spring which led to a multitude of small home projects being tackled. Spending on dining out will be greatly reduced. Nonstore retailers – which include online retail outlets – could benefit from avoidance of brick-and-motor stores. Department and apparel stores will see reduced spending as consumers are not interested in updating their wardrobes at the moment.
The weakness in March retail spending – especially for big ticket items – will impact the advance estimate of first quarter GDP when it is released on Wednesday, April 29. Consumer spending has been a mainstay of growth in recent quarters but the arrival of COVID-19 and efforts to keep it from spreading rapidly will cause what looked to be another quarter of modest growth to one in which recession looks imminent. The District Bank Nowcasts of GDP have been revised lower. The variation is significant and should not be read as a forecast but do indicate that growth is going to be weak, if there at all.
Data on initial jobless claims for the week ended March 11 at 8:30 ET on Thursday will remain in the millions as businesses stay shuttered and nonessential workers remain at home. It probably won’t be as bad as the first few weeks of the COVID-19 response, but it will be bad enough. More interesting will be the size of the insured rate of unemployment as it is seen how many workers who are applying for benefits move on to the rolls of continuing claims. I will continue to highlight unadjusted claims as trying to seasonally adjust the data is meaningless in the present circumstances.
The earliest surveys of the manufacturing sector are the New York Fed’s Empire State Survey at 8:30 ET on Wednesday and the Philadelphia Fed’s Manufacturing Business Outlook at 8:30 ET on Thursday. The general business activity index in the respective March reports showed a heavy drop in sentiment about conditions that was born out by the details in the report. April could show some intensification of the contraction but it should not be as shocking as in the prior month.
The New York Fed’s Business Leaders Survey for April at 8:30 ET on Thursday could also indicate that keeping service businesses closed is causing further contraction in activity. New York City is presently the epicenter of the COVID-19 outbreak in the US and is keeping the area’s businesses in lockdown.
The report on industrial production and capacity utilization in March at 9:15 ET on Wednesday will reflect the halt of activity for large parts of the manufacturing sector, the decline in energy extraction as prices plummeted and surpluses rose, and the fall in utilities output as businesses close their doors that won’t be matched by increased residential use during a bout of relatively mild weather.
The NAHB/Wells Fargo Housing Market Index for April at 10:00 ET on Wednesday could see a substantial drop from the 72 in March. The level of optimism reported by home builders has been declining slowly from the near-term peak of 76 in December, although some of that was a boost related to mortgage rates that brought some activity forward into the winter from the spring. Now that restrictions on movement are in place to combat the spread of COVID-19 and the economic outlook is highly uncertain except that it will be bad for a time, homebuilding is likely to scale back considerably.
Data on housing starts in March at 8:30 ET on Thursday should scale back from the strong 1.599 million units (SAAR) reported for February. There may be fewer starts for a number of reasons. Some may be contract cancellations, or a cautious response by builders in anticipation of a slower spring and summer season while the pandemic impacts economic activity. Permits issued are also likely to decline in March with fewer consumers ready or able to commit to a home purchase.
The March Import Price Index at 8:30 ET on Tuesday is anticipated to fall sharply due to both lower prices for fuels (priced in dollars) and an increase in the value of the US dollar versus other currencies. The Atlanta Fed’s Business Inflation Expectations for April at 10:00 ET will also reflect the declines in energy prices.
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