How Long Will the Economic Devastation Last?

By | March 30, 2020

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.

Overview

Coffee and Economic Review

European stocks fell on Friday, halting their biggest three-day rally in a sign, investors were focusing more on the spread of the virus despite hopes for further stimulus measures to combat its economic impact. The pan-European STOXX 600 was down Friday almost 2% in early trading. The benchmark index has recovered almost 17% since hitting its lowest since 2013 on March 16. The index remains more than 26% below its all-time high in a rout that has erased more than $3 trillion from the value of European firms. Leaders of the Group of 20 major economies pledged on Thursday to inject more than $ 5 trillion into the global economy to limit job and income losses from the coronavirus. The focus is now on the U.S., which now has more cases than China or Italy and things are not looking better.

Wall Street stocks tumbled on Friday, ending a massive three-day surge after doubts about the U.S. economy surfaced and the number of coronavirus cases climbed. U.S. stocks deepened losses on Friday even s the House of Representatives approved a $2.2 trillion aid package, the largest in American history. The Dow Jones Industrial Average slumped 4.06% on Friday to mend at 21,636.78 points, while the S&P lost 3.37% to 2,541.47. For the week, the Dow gained 12.8%, the biggest weekly increase since 1938, while the S&P increased 10.3%, the biggest gain since 2008.

The U.S. surpasses Italy and China with the most confirmed cases of COVID-19 cases. Europe is still the center of the storm, with total cases in Europe’s five largest economies topping 230,000 cases. The impact of virus-related shutdown became apparent in last week’s initial unemployment claims, which soared to 3.3 million. Most economic data reflect the period, before the COVI-19 outbreak intensified in mid-March. New home sales soared to their strongest pace in over 12 years. Consumer spending increased just 0.1% in February, suggesting modest strength before the virus hit. Most past economic data seem relatively unimportant now as the nation falls into recession.

The important question now is, how long will the economic devastation last? The answer depends on how the virus progresses in the U.S. and around the world. This past week, the March PMI’s for the Eurozone suggested a broad fall for the European economy. The services PMI fell to a record low of 28.4, while the manufacturing index fell to 44.8, which suggests the Eurozone economy could contract more than 4.0% in 2020. Wells Fargo projects that real GDP will fall 14.7% In the second quarter and 6.3% in the third. Estimates for the decline do vary among economists. However, there is no precedent for what is occurring. The U.S. has surpassed Italy and China with the largest number of confirmed COVID-19 cases. Testing has been ramped up and one the reasons for the rise in confirmed cases. Europe accounts for the bulk of cases outside of China and the number of cases there are a couple of weeks ahead of the U.S. The number of cases there has moderated but not flattened out, casting doubt on the more optimistic forecasts for the U.S.

Next week, we get a look at pending home sales, the Markit and ISM manufacturing and service indexes, construction spending, the trade deficit, factory orders and the payroll report. Incoming data will not be good, the only hope is the virus-impact is temporary in nature. The duration is of vital importance top the strength of the recovery.

Latest Data

The U.S. Economy:

The nominal goods deficit narrowed more than anticipated in February as imports fell, largely because of COVID-19’s impact on the global supply chain. The nominal goods deficit narrowed from $65.9 billion to $59.9 billion. Nominal imports fell 26% in February and the weakness was broad based. Nominal goods exports rose 0.5% in February. The advance data suggests that net exports were a positive for first quarter GDP, but March economic data will be terrible as the economy began contracting. The economy will contract deeply in the second quarter.

The pace of economic activity picked up in February. The Chicago Fed National Activity Index rose to 0.16 from -0.33 in January. Two of the four categories rose in February. The index’s three-month moving average ticked down to -0.21 from -0.11 in January, the 13th consecutive month the average has been negative. A positive reading means economic growth is above average. The economy was in decent shape before COVID-19, depending on the duration of the economic downturn, there is a probability that economic activity could bounce back quickly.

Personal income growth was strong before the OVID-19 pandemic hit. Nominal personal income grew 0.6% in February, matching January’s gain. The personal savings rate increased from 7.9% to 8.2%. Real spending growth has remained modest in February, although the virus impact was limited and a return to more normal temperatures boosted utility spending. Personal spending grew only 0.1% in February, the same rate as in January. Spending was subdued before the virus hit. There was a strong increase in spending on consumer staples in March, but the sudden rise in unemployment means even that sector’s strength will be temporary. Spending on big-ticket items will have fallen sharply in March and will decline further in April. PCE deflator increasing 0.1%, up 1.8% from a year earlier. Inflationary pressures will fall during the recession. Spending will be weak the next few months. The duration of the virus-impact will have a lot to do with the strength of the coming recovery.

Important Data Releases This Week

February pending home sales will be released on Monday, March 30 at 10:00 AM. Sales will hold up well after the 5.2% increase in January.

The March ISM manufacturing index will be released on Wednesday, April 1 at 10:00 AM. The manufacturing PMI will be bad, with a projected 43.5% reading, down from 50.1 in February.

The February construction spending report will be released on Wednesday, April 1 at 10:00 AM. Construction spending increased 1.8% in January and we project another 0.5% gain for February.

March vehicle sales will be released on Wednesday, April 1 at 4:30 PM. Sales came in at 16.8 million in February and a steep fall to 13.1 million is projected for March.

The February factory orders report will be released on Thursday, April 2 at 10:00 AM. Factory orders fell 0.5% in January and a 0.3% increase is projected for February.

The February international trade report will be released on Thursday, April 2 at 8:30 AM. We project the trade deficit will fall to $41.5 billion for February, down from January’s $45.3 billion.

The March ISM non-manufacturing index will be released on Friday, April 3 at 10:00 AM. The February non-manufacturing index came in at 57.3 in February a steep fall to 42 is projected for March.

The March employment report will be released on Friday, April 3 at 8:30 AM. Payroll growth was strong in February at 273,000. The March employment survey was conducted the week ending March 14, suggesting a decent report for March. The April report will be historically bad.


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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.