April Consumer Sentiment and March Durable Goods Orders

KEY DATA:  Sentiment: -17.3 points; Current Conditions: -29.4 points; Expectations: -9.6 points/ Orders: -14.4%; Ex-Transportation: -0.2%; Capital Spending: +0.1%

IN A NUTSHELL:  “Consumers are looking a little toward the future, but how long that will last depends upon the success or failure of the reopening process.”

WHAT IT MEANS:  The great unknown right now is what will consumers do as the economy starts reopening.  Clearly, as people get rehired and their incomes rise (if that is the case, which is not true for everyone), spending should improve.  But how much is the question.  That will depend upon consumer confidence.  The University of Michigan’s Consumer Sentiment Index tanked again in April, but the final reading was up a little from the mid-month reading.  That gain occurred when the first discussions about reopening the economy began.  As the month ended, though, it looks like the growing confidence faded.  Households are more hopeful about the future than they are about current conditions.  Whether that can be sustained will depend upon how well the openings go and whether there will be a resurgence of the virus.  As the report and many others, including myself, have pointed out many times, if we have to reinstitute stay at home requirements, the impacts could be devastating.   

Durable goods orders tanked in March, led by huge declines in aircraft and vehicle orders. But excluding transportation, demand held in reasonably well. Boeing had a large number of cancellations and orders fell nearly 300% over the month.  The sharp decline in vehicle sales caused a nearly 20% drop in orders in that sector.  Computer orders also fell sharply.  On the other hand, communications and electrical equipment demand rose.  There was a major surprise in the report: The measure of business investment spending, capital good excluding defense and aircraft, rose modestly.  Given all the shutdowns, that will likely be reversed when the April numbers are released.

MARKETS AND FED POLICY IMPLICATIONS:The high-stakes game of “open the economy” is starting.  It’s good to know that we can now go bowling, get our hair cut, work out and get all sweated up with our friends at a gym and then drop in to get a massage and a mani/pedi (whatever that is) in Georgia is heartening.  And, I really need a new tattoo soon, so that adds to my happiness. I am going to hop on a plane and get to Atlanta as soon as possible. I make no apologies for my view that opening too soon creates a massively greater risk than opening late.  The impact on consumer confidence and therefore spending of having to reinstituting restrictions could be devastating. It could wipe out much of the progress that could come from the consumer and business support programs passed by the government, as well as the credit and lending actions taken by the Fed.How we would get out of that hole is something I don’t even want to think about.  So all we can do is hope that the gamble works out.  How strongly demand rises, though, will depend upon how safe people feel.  There will likely be an initial jump in demand but it may not be nearly as great as many think.  As long as the virus is running wild, a significant segment of the population will either be unwilling to get back into the world or will do so in a limited way.  Since we are still well away from having a national testing system in place, don’t expect demand to surge and stay high.  Remember, the generation with the most disposable income is the baby-boomer generation and they are also in the high-risk category.  If they get back in the game cautiously, as I suspect will be the case, the V-shape recovery theory falls apart.  But even worse, a resurgence in the virus could send that group into hibernation and that would make a sustained recovery almost impossible.