The long road to recovery - Capital Economics
US Economics

The long road to recovery

US Economics Weekly
Written by Paul Ashworth

Most of the 50 states have now begun to ease their lockdown restrictions, with many states in the interior now maintaining only minor restrictions on normal activity, although states on both coasts still have major restrictions in place. Nevertheless, the reopening of the economy appears to be a slow-moving process.

Most of the 50 states have now begun to ease their lockdown restrictions, with many states in the interior now maintaining only minor restrictions on normal activity, although states on both coasts still have major restrictions in place. Nevertheless, the reopening of the economy appears to be a slow-moving process.

The rebound in Apple maps route requests and gasoline demand indicates that people are travelling around more freely. And the bounce in mortgage applications to purchase a home suggests that looser monetary policy and lower interest rates are beginning to have their intended effect on housing. But some of the other high frequency data like TSA airport passenger screenings, OpenTable restaurant bookings and movie theatre visits show that lingering virus-fears are keeping demand for many services well below normal levels.

The latest jobless claims data also point to nothing more than a very gradual recovery. The 2.5 million increase in continuing claims in the week ending May 9th was almost as big as the number of new jobless claims filed in that week. That implies the number of people being recalled to work – either because businesses were reopening or because firms were taking advantage of Paycheck Protection Program grants – was still very low. (See Chart 1.)

Chart 1: Initial & Continuing Jobless Claims (Mns)

Source: Refinitiv

The release this week of the minutes from the FOMC meeting in late April revealed that Fed officials are concerned that the recovery could turn out to be a disappointment. A number of participants “judged that there was a substantial likelihood of additional waves of outbreak”, which “could lead to a protracted period of severely reduced economic activity”. Beyond that, officials were also worried about potential long-term impacts; if the skills of the long-term unemployed atrophied making it harder for them to re-join the workforce or if virus-mitigating restrictions hit business productivity. “Even after social-distancing requirements were eased, some business models may no longer be economically viable, which could occur, for example, if consumers voluntarily continued to avoid participating in particular forms of economic activity.” The early post-lockdown high frequency data suggest those fears are justified.

Officials also discussed what further policy action could be taken if the recovery does disappoint. The first step would be to issue more explicit forward guidance, either by pledging to leave short rates at near-zero until a certain date or until certain conditions had been met – such as the unemployment falling below a threshold and/or the inflation rate climbing to the 2% target. But when the five-year Treasury yield is at 0.3%, there isn’t an awful lot to be gained from forward guidance unless the Fed is willing to commit to leaving rates at near-zero for up to a decade. A pledge to ramp up purchases of Treasury securities, possibly coupled with explicit targets for long-term yields, might provide more bang for the buck. But with the 10-year yield at less than 0.7%, even that bang would be more of a whimper.

The week ahead

The April durable goods and personal spending data will further illustrate the extent of the sudden-stop in business investment and consumption. Orders would have been hit particularly hard by the closure of most autos plants, while consumption was dragged down across the board, with even spending on health care shrinking because of the closure of dentists’ and some physicians’ offices.


Data Previews

Durable Goods Orders (Apr.) 08.30 Thu. 28th May

Forecasts

Previous

Median

Capital Economics

Headline orders

-15.3%

-18.0%

-35.0%

Core (ex-transport)

-0.6%

-15.0%

-20.0%

Factory shutdowns cause orders to collapse

The already-reported plunge in manufacturing output suggests that durable goods orders also nosedived last month. (See Chart 2.) We expect a record 35% m/m decline.

Most of that fall was probably driven by transport orders, with factory closures resulting in a 72% m/m fall in motor vehicle output. That points to a similar fall in orders. Commercial aircraft orders are more of a wildcard. Boeing’s net orders for the year now stand at -255, reflecting a wave of cancellations, as global air travel has ground to a halt. The Census Bureau reported that orders had already slumped to -$16.2bn in March, so net orders may not have fallen much further in April. But they probably remained below zero.

The manufacturing output data suggest that the non-transport sector didn’t fare quite as badly, so we expect a 20% drop in core durable orders. But that would still point to a massive fall in business equipment investment in the second quarter.

Chart 2: Mfg. Output & Durable Gds. Orders (%y/y)

Source: Refinitiv

Personal Income & Spending (Apr.) 08.30 Fri. 29th May

Forecasts

Previous

Median

Capital Economics

Personal Income

-2.0%

-7.0%

-7.5%

Personal Spending

-7.5%

-12.6%

-14.0%

Consumption on course for 50% annualised fall in second quarter

We estimate that real consumption fell by nearly 15% m/m in April.

We already know that lockdowns caused underlying retail spending to plunge by more than 15% m/m. Spending on motor vehicles fell by 25% m/m, while gasoline consumption was hit by the further plunge in prices and a sharp fall in vehicle usage. The impact on services is less clear. The retail sales figures reported a near-30% m/m drop in bar and restaurant spending. The report slump in employment also indicates that health care services were hit hard – with dentists’ and physicians’ offices closed. But other key categories like housing and utilities were probably little changed. We are pencilling in a 12.5% fall in overall services consumption, giving a decline in total nominal spending of roughly 14% m/m in April, with real spending falling at a similar rate. We expect consumption to fall by up to 50% annualised in the second quarter overall. (See Chart 3.)

Meanwhile, the plunge in employment suggests personal incomes fell by close to 10%, but that will have been partly offset by the $1,200 stimulus cheques and increased unemployment insurance payments. We are pencilling in a 7.5% m/m fall.

Chart 3: Real Consumption

Sources: Refinitiv, CE


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EST (BST-5)

Previous*

Median*

CE Forecasts*

Mon 25th

Memorial Day Holiday – Markets Closed

Tue 26th

Case-Shiller House Prices (Mar)

09.00

+0.5%(+4.2%)

Conference Board Consumer Confidence (May)

10.00

86.9

87.0

90.0

New Home Sales (Apr)

10.00

627,000

490,000

450,000

Wed 27th

Fed’s Beige Book

14.00

Thu 28th

GDP (Q1, 2nd Est.)

08.30

-4.8%

-4.8%

-4.8%

Durable Goods Orders (Apr, Prov.)

08.30

-15.3%

-18.0%

-35.0%

Core Durable Goods Orders (Apr, Prov.)

08.30

-0.6%

-15.0%

-20.0%

Initial Jobless Claims (w/e 23rd May)

08.30

2,438,000

2,000,000

Fri 29th

Advance Goods Trade Balance (Apr)

08.30

-$64.4bn

-$64.2bn

Advance Wholesale Inventories (Apr)

08.30

-0.8%

Advance Retail Inventories (Apr)

08.30

+0.9%

Personal Income (Apr)

08.30

-2.0%

-7.0%

-7.5%

Personal Spending (Apr)

08.30

-7.5%

-12.6%

-14.0%

PCE Deflator (Apr)

08.30

-0.3%(-1.3%)

-0.7%(+0.4%)

-0.5%(+0.5%)

Core PCE Deflator (Apr)

08.30

-0.1%(+1.7%)

-0.3%(+1.1%)

-0.2%(+1.2%)

Chicago PMI (May)

09.45

35.4

40.0

45.0

Selected future data releases and events

1st June

ISM Manufacturing Index (May)

10.00

3rd June

ISM Non- Manufacturing Index (May)

10.00

4th June

International Trade (Apr)

08.30

5th June

Employment Report (May)

08.30

10th June

Fed Policy Announcement

14.00

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q ann. (%y/y) unless stated

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

2019

2020

2021

GDP

+2.1

-4.8

-40.0

+18.5

+21.5

+8.0

(+2.3)

(-5.5)

(+7.0)

CPI Inflation

(+2.0)

(+2.1)

(-0.4)

(0.1)

(+0.4)

(+1.2)

(+1.8)

(+0.4)

(+2.0)

Core CPI Inflation

(+2.3)

(+2.2)

(+2.1)

(+1.8)

(+1.7)

(+1.6)

(+2.2)

(+2.0)

(+1.7)

Unemp. Rate (%), Period Ave.

3.5

3.8

17.0

7.5

6.2

6.0

3.7

8.6

5.8

Fed Funds Rate, End Period (%)

1.50-1.75

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

10y Treas. Yld., End Period (%)

1.92

0.70

0.75

0.85

1.00

1.00

1.92

1.00

1.00

S&P 500, End Period

3231

2585

2900

2900

2900

3000

3231

2900

3200

$/€, End Period

1.12

1.08

1.10

1.10

1.10

1.09

1.12

1.10

1.05

¥/$, End Period

109

110

108

109

110

110

109

110

110

Sources: Refinitiv, Capital Economics


Paul Ashworth, Chief US Economist, paul.ashworth@capitaleconomics.com

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