KEY DATA: Retail Sales: -0.5; Ex-Vehicles: -0.4%/ IP: +0.6%; Manufacturing: +0.1%/ NAHB: -2 points/ Openings: +411,000
IN A NUTSHELL: “The economy was not doing particularly well before the virus hit, which is not good news.”
WHAT IT MEANS: February data are still not reflective of where we are going, but it would be nice if they were strong enough to have formed some type of base. That was hardly the case. Take retail spending, which we know will be largely limited to online sales going forward. Consumer demand faded in February, though that came on top of a strong January gain. Together, though, the two months didn’t show much of an increase. We can discount the sharp decline in gasoline because prices fell sharply, but people didn’t eat out, buy electronics, appliances, clothing or just about anything else. All they did was shop online – which as I said, is what they will likely be still doing to some extent. It will be interesting to see what the March retail numbers look like. On the one hand, the last two weeks will be disastrous for anything but online sales. But the panic buying may have made up for at least some of that. So, the decline should be large, but maybe not as enormous as some fear. April is when we could see the worst drop as it looks like social distancing will last at least the entire month.
As far as manufacturing was concerned, output edged up in February. Yes, overall industrial production soared, but it was all weather related. Utility output was up over 7% after having declined by about 5% or more the previous two months. What saved manufacturing was a surge in vehicle assemblies. I suspect that not a lot of people are out kicking the tires these days, so that could reverse with a vengeance in the months to come. Look for a truly ugly March manufacturing production number.
On the housing front, the National Association of Home Builders reported that its index edged down only relatively modestly in March. All of the components, including traffic declined a small amount. That was a pleasant surprise.
The most meaningless, outdated number of the day was job openings, which were up sharply in January. That is likely to change dramatically once we get the March numbers, in two months. MARKETS AND FED POLICY IMPLICATIONS:Is a recession baked in the cake? It is hard to see that it isn’t. Whether the decline lasts four, six or eight months and is officially declared a recession is unclear, but we haven’t seen the really bad data yet. The first time we get an employment report down massively, and we are going to get at least one or two, that will test the will of households. How businesses continue to produce and stock the supply chain will be a challenge. Europe is going into recession and China is just starting to recover, so at least one or two quarters of negative world economic growth is likely. Second quarter growth could be sharply negative. We will not shake the downturn until people can get back out to live their lives more normally. And that requires largely ending the spread of the virus. This country has been unprepared to even measure the extent of the problem as testing is way behind the rest of the world. That is a failure of leadership and planning. As testing ramps up, the numbers will surge. But it is not clear when we will get things together as we are in a leadership vacuum that is being filled by governors and mayors making independent decisions but without the resources to meet the challenges they face. The Senate is not even discussing an economic stimulus package, the President has just discovered there really is a problem and the administration’s economic brainless trust is either claiming we will not go into a recession or is proposing ideas that make little sense. I was criticized for attacking the payroll tax proposal. But if you are not working, you don’t pay the payroll tax anyway! Help is needed for those who are going to or have already lost their jobs, their businesses, their incomes, their health care and their ability to meet basic needs and pay bills and debt. It seems our federal leaders in the administration and Congress just don’t get it. The result is that the downturn will likely be longer and deeper than necessary because of this federal-level leadership failure and it is why I and so many other economists now have a recession in our forecasts.