KEY DATA: Retail Sales: -8.7%; Ex-Vehicles: -4.5%/ IP: -5.4%; Manufacturing: -6.3%; Capacity Utilization (Man.): -4.7 points/NAHB: -42 points/Empire State: -56.7 points
IN A NUTSHELL: “The decline in economic activity is breathtaking.”
WHAT IT MEANS: The data are just starting to come for March and early April and they are even worse than expected. Indeed, the declines were breathtaking. Let’s start with March retail sales, which were down massively. Gasoline sales cratered, though some of that was due to the decline in prices. But the rest of the categories show how demand has shifted. The declining categories: Vehicles (-25.6%), furniture (-26.8%), electronics (-15.1%), gasoline (-17.2%), Clothing (-50.5%), sporting goods (-23.3%), department stores (-19.7%) and restaurants (-26.5%). Keep in mind, most of the closings were in the second half of the month. Not surprisingly, supermarkets soared, posting a 26.9% rise. Health care, building supply and online stores were up strongly, but those increases paled in comparison.
A closed economy means reduced production and every single industry posted a decline in output. This was the third greatest decline on record, with the other two occurring during the post-WWII demobilization period. The largest drop was in vehicles, as the assembly rate declined by over one-third. Eight of the nineteen manufacturing industry groups were off by double-digits. Capacity utilization also fell off the cliff, dropping by the largest amount on record.
Moving into early April, the National Association of Home Builders index was down an amazing 42 points. It went from 72 to 30. Traffic largely disappeared. So much for the housing market. The New York Fed’s Empire State Manufacturing Index disappeared from sight. That should not surprise anyone given that the New York metro area has been the epicenter of the pandemic.
IMPLICATIONS:The economic numbers are coming in even worse than most economists expected. We really cannot wrap our minds around these enormous levels of changes, so it is hard to forecast the total collapse that we are starting to see. And the April numbers, which will reflect a whole month, are likely to be a lot worse. Which brings us to the equity markets. The spread of the virus may be easing, at least we hope. New York looks like it is near or at the peak, but other areas are starting to heat up. Every state is now involved. Starting to open the economy in two weeks (May 1st) is hardly likely and when the economy does start to open, it is not going to happen quickly or easily. Yet investors have been exuberant the last three weeks. Is it rational or irrational? Where is Alan Greenspan when we need him? First quarter earnings are just starting to come in and for most firms they are gruesome. And that was with less than one month of a shutdown. What happens when we have two or even three months of restricted activity in a quarter followed by a slow, rolling reopening? It is hard to comprehend why businesses would invest in this type of economy. Businesses may start opening, but which ones? Without wide scale testing capacity, can we really open retail establishments that require social contact? The rest of the world is also going to slowly reopen and who knows when that will happen. And state and local governments are already starting to downsize as tax revenues are crashing. It is one thing to say that the government and the Fed are pouring trillions into the economy, but it is another to say that demand will recover to anywhere close to what it had been in February. And if it doesn’t, firms will not see demand raise enough to keep the government funded workers, so layoffs and business closings could resume. Households will have used up some of the money they were given and if they don’t have jobs (the unemployment rate could still be double-digits in July), spending will fade. And that could trigger a significant increase in loan losses and pressure on financial institutions. That is the prospect for the summer/fall economy. And what if the reopening has a set back due to a resurgence in parts of the country, even if those relapses are minor? So, where are the profits going to come from? I am just an economist, but I simply don’t see what investors are seeing and to be honest, what other economists are saying is going to happen. I focus on the underlying factors that will drive future economic growth and earnings and while we will see an initial upturn once the economy reopens, the strength and length of that recovery is not clear at all.