More Unfortunate Records. But It Was May Day.

By Dan North | May 1, 2020

More unfortunate records. But it was May Day

It’s been another huge week for economic developments, and of course, most of the news has been grim, but not all of it. Let’s start with the worst.

Eurozone Q1 GDP

From the “You think you have it bad” Department, comes news out of Europe.  As noted below, Q1 GDP in the U.S. fell -4.4% q/q annualized, worse than expectations, and the biggest decline since the Great Recession. However, in the Eurozone, things are much worse. Remember, the lockdowns and shut-ins started earlier there, and they are more severe than they are here.  As a result, Q1 GDP in the Eurozone fell -14.4% q/q annualized, and of course, that’s a record low. Compare the Eurozone and the US GDP charts below and you can see how much more the European economy has suffered than ours. Looking ahead, our forecast for US Q2 GDP is around -30% q/q annualized. The forecast for the Eurozone, however, is for a much, much bigger loss. So if you think you have it bad… just take a second to think of our friends in Europe and what they are going through.

The Federl Reserve Policy

As noted earlier this week, the Federal Reserve reiterated its policy of “All-in, for as long as it takes.” The language accompanying the meeting was very clear: “The Federal Reserve is committed to using its full range of tools to support the US economy in this challenging time...” (The Fed) “expects to maintain this target range until it is confident that the economy has weathered recent events.” “We’re going to not be in any hurry to withdraw these measures or to lift off. We’re going to wait until we’re quite confident that the economy is well on the road to recovery.” That policy shows up in the Fed’s balance sheet which conceptually is the amount of money the Fed is making available to support the economy.  It will continue to rise sharply. Chairman Powell also took the unusual step of calling on Congress and the Administration to follow up the CARES act with even more aid to support the economy. 

US Q1 GDP

US Q1 GDP was also covered earlier in the week but here’s a recap:

  • -4.8% q/q annualized, worse than expectations of around -3.5%. It was the biggest decline since the Great Recession.
  • Not surprisingly, personal consumption which accounts for 70% of all economic activity, was responsible for most of the decline, falling -7.6%, a 40-year record.
  • On a monthly basis, we saw what we expected, but it was still stunning.  Consumption was actually positive in January and February. But consumption in March set a record low of -7.3%; the previous record was -2.5%.
  • As spending shrunk so violently, of course, consumers saved their money. As a result, the personal savings rate leaped from 8.0% to 13.1% (yes, that’s another record increase), the highest in 38 years. Given the shutdown and the tremendous uncertainty surrounding the current situation, it’s no wonder people stopped spending and started hoarding cash. But of course when spending stops, so does the economy.

ISM Manufacturing Index

Pending home sales fell a dizzying -20.8%, the second-biggest decline on record. Those sales are a precursor to existing home sales which will plummet, but you knew that already.

The ISM manufacturing index, which signals contraction under 50, fell from 49.1 to 41.5, which was actually a bit better than expected. There are 10 components of this survey, and the critical “new orders” component came crashing down from 42.2 to 27.1. Only one of the ten components is above 50 (and that’s for the wrong reason).

Weekly Jobless Claims

Weekly jobless claims indicated that another 3,839,000 Americans filed for unemployment insurance last week, bringing the six week total to 30,307,000. In theory that brings the unemployment rate to over 20%, twice as much as the previous post WW-II era record, and the worst since the Great Depression. Another way to think about it is, before this mess, about 155 million people were at work in the U.S. Now 30 million out of those155 million people have lost their jobs in just six weeks. It’s unthinkable. It’s little wonder that people are very anxious to open back up the economy. The only silver lining is that for now, it looks like jobless claims have peaked – at an astronomical level, yes – but peaked.

Consumer Confidence

Consumer Confidence suffered a brutal pummeling in April as you might imagine, falling from 118.8 to 86.9. And yes, the 31.9 point decline was another record. The index is derived from a phone survey with several questions, one of which is the participant’s assessment of the present situation. Not surprisingly this measure fell a stunning 90.3 points – the previous record had been only 26.1. However, when asked about the future, participants were remarkably optimistic. Their expectations about the future actually went up 7.0 points to 93.8, a level just above the long-term average. In other words, consumers view the current situation, correctly, as a nightmare, but they still feel good about future prospects. We have also seen this same pattern in several business surveys as well. There truly is hope that the economy can rebound quickly, and as we all know, an optimistic attitude just by itself can materially help the situation.

To finish on some other bright notes, apparently this week, developments for both a COVID-19 vaccine as well as a treatment have made some unexpected advances. States and countries are making small steps towards opening back up.

And it was May Day! In many countries, May Day is a major holiday similar to our U.S. Labor Day, and goodness knows we can all appreciate the importance of jobs right now. And it’s also often a celebration of the seasons changing from a rainy, gray spring, to a bright, warm summer. 

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