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Look behind at May 18, 2020 week: Fed policy still focused on mitigation, economic data says recession is here

A look behind at the May 18 week suggests that April numbers reflect the steep and sudden downturn as businesses shuttered and consumers stayed home in the immediate response to a worsening in the spread of COVID-19. The early numbers for May suggest that some of the initial collapse in activity has lifted, but only from very low levels. Conditions in April and May are consistent with a deep recession that likely began in March.

On May 19 the Labor Department announced it would end the data release “lock-up” system once and for all. Earlier in 2020 the Labor and Commerce Departments said they were scaling back the process of releasing economic data to news outlets. Previously, accredited news services would gather in secure rooms sponsored by the Bureau of Labor Statistics (BLS) and the Commerce Department where the information would be distributed on an embargoed basis. At release time, government officials would allow the electronic distribution of headlines and data. However, over the years, technology allowed some news outlets an unfair advantage. There were questions about some of the new services using their access to the data to power a secondary market of automated trading. The Labor Department decided to end its provision of advance copies of the data to new services and only offer “pen and paper” news briefings in advance of a data release. The Commerce Department followed suit. The necessity to limit person-to-person contact led to the suspension of these news briefings early in March. The Labor Department will now dispense with this altogether. All reports will be released on the internet at the announced time – usually 8:30 ET or 10:00 ET, depending on the report.

The minutes of the FOMC meeting of April 28-29 encompassed the views of Fed policymakers three weeks ago as they assimilated the available data and tried to piece together a plan of action. At the last meeting it was clear that huge risks and uncertainties remained. Policymakers were still responding to the impacts of the public health crisis and not yet ready to move beyond ensuring financial stability and mitigating the worst of the damage to the labor market. Disinflationary pressures were a concern, but one that did not require immediate attention.

Chair Jerome Powell’s testimony on May 19 offered an assessment of the Fed’s focus in the present and a recap of the actions taken so far. It was not materially different from the FOMC decision at the last meeting that rates were appropriate, forward guidance required a restoration of consumer confidence before even beginning to consider a change of interest rate policy, and that asset purchases would continue until no longer needed. Efforts to provide ample liquidity so far were viewed as largely successful, although subject to adjustment as warranted, and credit facilities were ramping up efforts to reach Main Street and state and local governments who are strapped for cash.

Vice Chair Richard Clarida spoke on May 21 and echoed much of what the Chair said earlier in the week. A couple of interesting items were that the FOMC will prepare a new Summary of Economic Projections at the June meeting after circumstances made it a useless exercise at the March meeting. While risks and uncertainties remain unusually elevated, the FOMC now has enough data to forecast a few scenarios. He noted that while the review of the Fed’s monetary policy framework had been sidelined as policymakers worked on stabilizing financial markets and addressing immediate impacts from the pandemic, the review was well advanced as of February. Publication of their findings later this year is to be expected. He also said that from his view, the recession should be dated from March 1.

Data on the housing market saw the erasure of the upward trajectory of the last five years or so. While levels are not quite back to the depths of the housing bust, activity is essentially half of what it was a month or two ago. Consumers have largely withdrawn from the housing market due to job losses and/or the uncertain outlook which makes buying a home riskier. Memories of the distress caused by the last recession are still painful and plentiful. With the economic contraction caused by COVID-19 severe and just starting, even historic lows in fixed mortgage rates are not going to tempt more than the best qualified borrowers into the housing market.

The NAHB/Wells Fargo Housing Market Index for May was up to 37 after 30 in April, but this is a far cry form the 72 as recently as March. The number of housing starts was down 30.2% in April to 891,000 units (SAAR), a decrease of nearly half from the near-term peak of 1.617 million units in January. Permits issued in April were down 20.8% to 1.074 million units, only about two-thirds of the near-term peak of 1.536 million units in January. Builders have had to contend with reduced demand as well as slowdowns in projects related to restrictions of personal contacts and lack of supplies with the virtual halt of nonessential manufacturing.

Sales of existing homes fell 17.8% in April to 4.33 million units (SAAR) after 5.27 million in March. Declines over the past two months are a marked contrast to the near-term peak as recently as 5.76 million in February. The slowdown means that supplies of existing units are more plentiful and staying on the market a bit longer. Home prices typically rise more quickly at the start of the quarter and the 2.2% increase in the median price to $286,800 in April after March is consistent with that pattern. However, upward momentum could be hard to maintain in the face of a profound lack of buyers and the onset of a deep – if hopefully brief – recession.

Massive numbers of new claims for unemployment insurance benefits continued to roll in in the week ended May 16, although the pace has eased up a bit. Unadjusted claims were down 182,265 to 2.174 million in the week. New claims have totaled 35.296 million since the start of the COVID-19 business closures led to unprecedented layoffs around mid-March. As of the May 9 week, the unadjusted insured unemployment rate climbed to a high of 17.2% and seems set to rise further with more claims approved and added to the level of insured unemployment which was up to 22.942 million in the week, a fresh historic high.

State unemployment data for April showed unemployment rates up substantially – some to record highs – and payrolls declines across all 50 states and the District of Columbia.

The Philadelphia Fed’s Manufacturing Business Outlook Survey showed the general business conditions index retraced some of the plunge in the prior month while remaining at very low levels. The Philadelphia headline was up 13.5 points to -43.1 after -56.6 in April which was the third lowest in a series that goes back to 1968. The May number was in the top 10 of low readings. Overall, conditions are exceptionally weak for the factor sector.

There was no hint of improvement for the service sector in the New York Fed’s Business Leaders Survey for May. The index was little changed at -75.8 after the record low of -76.5 in the prior month. The six-month outlook index was more positive at -4.9 after -30.7. However, this is still a report with little evidence of nascent improvement in current conditions.

The Conference Board’s Leading Economic Index for April was down 4.4% on top of a revised down 7.4% in March (previously down 6.7%). Huge numbers of layoffs and greatly reduced workweeks were the main reasons for the decline in April. The index is consistent with a fall into recession in March.

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