Still in Freefall and Looking For a Way Out
We are still in the freefall stage of the economic shock brought on by the COVID-19 pandemic and will likely remain in this stage at least through the second quarter.
Against this backdrop U.S. equity markets have been downright ebullient over the last month, looking forward to business reopenings and celebrating the flattening of the curve of new virus cases.
Around 31 states are currently planning some opening up of their economies and businesses starting this month.
This should return the U.S. economy to growth earlier than we thought a month ago as consumer spending returns to more categories of spending and some workers get called back to their jobs after being furloughed over the past month and a half.
But before you pop the champagne bottles and partly like its 1999, consumers are likely to remain a cautious bunch until we have more widespread protections and testing in place or better yet, a working therapy or vaccine that reduces the health risks to society from the virus.
Moreover, growth could stall again in the fall and winter if we get another resurgence of the virus and more widespread business shutdowns are once again required.
It is difficult to write about the state of the U.S. economy today because the economic indicators are so horrifically bad. Usually I can find one or two indicators that are bucking the downtrend, but the economic indicators for March and April have been almost uniformly terrible.
Widespread stay-at-home orders and business shutdowns have decimated business sales and cratered consumer demand to an extent that hasn’t been seen since the Great Depression.
Consumer spending makes up about 70% of U.S. GDP, so as consumers go into hibernation to an extent never imagined by even the most imaginative economists, the rest of the economy goes into freefall too.
Millions of small businesses were almost immediately put into jeopardy of insolvency in March and were forced to shed or furlough millions of workers. Initial jobless claims over the past six weeks have totaled over 30 million, laying bare for all to see the extent of the economic damage. The U.S. unemployment rate is rapidly approaching 20% of the labor force.
We will get an update on the health of the U.S. labor market next Friday with the release of the April Employment Report. We expect the report to show 24 million jobs lost in April, including 4 million manufacturing jobs, with the U.S. unemployment rate rising to 18.0%.
The unemployment rate would be even higher in April were it not for the millions of formerly employed folks self-reporting as no longer in the labor force. We expect to see a sharp slowdown in average hourly earnings and hours worked too as many employers slashed wages for existing workers or reduced their hours. This will add another negative hit to disposable personal incomes.
So when are we going to get out of this economic horror show?
A return of jobs and consumer spending will be critical, but there is a lot of uncertainty about how quickly either will be coming back. Much depends on how quickly this new coronavirus can be tamed. We expect a partial rebound in real consumer spending in the second half of this year, but business investment spending is expected to continue to contract for the rest of the year. And even when GDP growth returns, it will likely be a multi-year process to get economic activity back to the level it was before the pandemic. This assumes everything goes according to plan.
I had to dig a bit, but I will close with one final nugget of hope surrounding the U.S. consumer and economy. The drop in consumer spending has been so profound this spring that the personal savings rate in the U.S. has jumped to 13.1%, its highest level since 1974. These savings will be an important reservoir of support for consumers’ ability to spend in the quarters ahead. But will they be willing to do so?
To find out more about our latest U.S. economic forecasts, check out this week’s U.S. Outlook Report.