NAROFF ECONOMICS, LLC
Joel L. Naroff
President and Chief Economist
INDICATOR: April NonManufacturing Activity and March Trade Deficit
KEY DATA: ISM (NonManufacturing): -10.7 points; Activity: -22 points; Orders: -20 points; Employment: -17 points/ Trade Deficit: $4.6 billion wider; Exports: -9.6%; Imports: -6.2%
IN A NUTSHELL: “Declining world economic activity hit the U.S. hard in March, but the empire will likely strike back in April, when domestic activity shut down.”
WHAT IT MEANS: It wasn’t just the industrial portion of the economy that shut down in March and into April. Non-Manufacturing also cratered. The Institute for Supply Management’s index dropped to its lowest level in eleven years, as all the key sub-indices, business activity, orders and employment, flat lined. With order books thinning, conditions are likely to worsen over the next few months, despite the beginnings of the economy reopening.
The COVID-19 pandemic is a global economic disaster and we can see that in the trade data. In March, U.S. imports fell sharply, led by massive declines in consumer goods and vehicles. With the economy operating for half the month, demand for foreign capital goods, industrial products and food were up. But with the rest of the world, especially China, having already moved into shut down mode, our exports fell even more. Every major category, including food, was down. As for the situation with China, the March deficit was down 43% from March 2019. That may change over time, but at least the outflow of income to China has slowed for a while. With exports falling more than imports, there was a major widening in the trade deficit. It looks like the initial reading on the trade deficit that was in the first quarter GDP report may have been a little light and we could see growth revised downward. Looking forward, with businesses shuttered and consumers hunkered down, look for our imports to disappear in the next trade report and the deficit to narrow. That has been the typical pattern when we go into recession.
MARKETS AND FED POLICY IMPLICATIONS: We are already beginning to see the depths of the downturn that we are in and the most distressing April numbers have not even come out. While there is some reopening, it is happening in fits and starts and is unevenly distributed across the country. If you thought that it would be quick and easy, think again. This is going to be a very long process that should stretch through the summer. And that assumes no major resurgence in the number of new cases and deaths. That is hardly assured, if you believe the scientists – which I do. You also have to factor in the reduction in government welfare payments to households and businesses, the likelihood of growing numbers of bankruptcies and simple fear on the part of consumers and workers in returning to what we call more normal lives. Friday we get the April employment report and it could show the largest decline in employment in the history of the country – something in the range of 22 million. The unemployment rate should rise above 15%. I have it more like 18.5%, but it may take us a month or more to peak. Regardless, the hole has been dug and we have to figure out how to fill it in. Given it is the size of the Grand Canyon, as I keep saying, it will be a long time before we get back to the employment level we had in February and an even longer period before we see an unemployment rate near 5%, let alone the 3.5% rate we had two months ago. I am not trying to be negative, just realistic. Hope for the best but plan for the more likely and that is “u” not a “V”-shaped recovery.