The Economy is Likely Heading for Negative Growth in the Second Quarter

By | March 23, 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.


Coffee and Economic Review

Stock markets rebounded from some of their recent big losses, pulling further from three-year lows as central banks and governments pledged a lot of cash to reduce the economic impact of the coronavirus pandemic. Shares soared at the start of trading in Europe, with the pan European STOXX 600 index jumping nearly 5%. MSCI’s All Country World Index, which tracks shares in 47 countries was up 1.5%. However, in an indication of the damage inflicted on global equities from the pandemic, the index is set to finish 9% lower for the week, adding to the previous week’s 11.1% plunge. As the spread of the coronavirus brought much of the world to a halt, nations have poured even-more massive amounts of stimulus into their economies, while central banks have flooded markets with cheap dollars to ease funding strains.

The global economy is already in a recession as the hit to economic activity from the coronavirus pandemic has become more widespread, according to a poll by Reuters. More than three-quarters of economists based in the Americas and Europe polled in the week of March 15-21 said that there is no longer any doubt that the longest global expansion on record will end. The key now is gauging the depth and duration of the 2020 recession. The evolving news on COVID-19 has triggered “forecast leap frogging,” with economist repeatedly lowering their forecasts. Among the big three economies, the U.S. and the euro area will see negative growth, while China will come in at a paltry 1.5%, said Ethan Harris, head of global economic at Bank of America.

U.S. stock indexes finished another bruising week with sharp losses as panic over the coronavirus outbreak refused to abate, amid the acceleration of the global death toll. Investors have not been comforted by the government’s response to limit the economic impact of the COVID-19 pandemic, whose severity and duration are unclear and an early Friday rally faded fast. The Dow fell 913.21 points on Friday, or 4.6% to end at 19,173.98. The S&P fell 4.33%, or 104.47 points to end at 2,304.92. For the week, the Dow lost 17.3% and the S&P 14.98%. So far, the Dow is off 35.1% from its Feb. 12 high, while the S&P 500 is down 32%. The S&P 500’s price-to-earnings ratio, based on broad estimates for the next year, has dropped from over 19 in late-February to 14.2 last Wednesday, according to Definitive data. This suggests a buying opportunity when the panic subsides.

The coronavirus hit home last week as governments, businesses and consumers took drastic steps to halt the COVID-19 pandemic. Government mandates forced closures of schools, bars, restaurants, gyms and movie theatres accelerated the shutdown. New Jersey’s governor was expected this weekend to follow four other states. California, New York, Illinois and Connecticut in demanding Americans close-up shops and stay home to slow the spread of the virus. The sweeping state-by-state public health restrictions is unprecedented in width and scope. The five states represent about a quarter of the entire U.S. population and account for nearly a third of the nation’s economy. This abrupt suspension of the real economy is threatening to change into something more sinister. A world where bills must be paid and payrolls met but business cannot be conducted can lead to an endless downward spiral.

To help stop markets from seizing up, the Fed has responded swiftly with a barrage of moves, including establishing a commercial paper funding facility (CPFF), primary dealer credit facility (PDCF), money market mutual fund liquidity facility (MMLF), and swap lines with foreign central banks to improve dollar liquidity. This is in addition to massive overnight repo operations, with a minimum of $700 billion of Treasury and MBS purchases. They set the fed funds rate back to zero bund, eliminates reserve requirements and encouraged banks to use the discount window to ”support the smooth flow of credit to household and businesses.” In short, they do want a health crisis to become a financial crisis, a credit crisis, or a liquidity crisis, all which looked frighteningly possible this last week, raising memories of September 2008. It also appears that fiscal help is on the way of a trillion, or so, but what final form it takes and timing is not yet clear.

The economy is likely heading for negative growth in the second quarter. The big question is duration. We don’t know yet, how spending will be affected. Right now, Americans are in a buying frenzy on consumer staples. However, unemployment claims are about to soar, likely in the millions. We will  see a sharp drop in GDP in the second quarter but the third quarter is still uncertain. The timing of the closures will have a large say on whether the recovery begins in the third quarter, or will there still be lingering effects that bring on two negative quarters, i.e. a recession. Timing is everything. The longer we stay shutdown, the greater the economic damage. The worst-case scenario is truly frightening. When the virus fades, the quality and quantity of the response will be the key to the strength of the recovery.

Next week, all eyes will be on Congress and the administration to see the fiscal response. We also get a look at the Chicago Fed National Activity Index, new home sales, durable goods orders, personal income and outlays, advance trade in goods and average weekly unemployment claims, which will be big.

Latest Data

The U.S. Economy:

Retail sales unexpectedly dropped 0.5% in February, with broad weakness. The coronavirus does not seem to a factor, as it included grocery stores, drugstores and other segments where recent buying-up was aggressive.  Vehicle sales fell despite an increase in unit sales and gasoline sales were a major drag. Housing segments were weak. In February, sales 4.3% above a year earlier. Overall, the coronavirus impact was small, but it will be larger in March. Excluding autos, sales fell 0.4$ and excluding autos and gas, they fell 0.2%. Consumers have been supporting economic growth. In the next few months, they will be critical. Some retailers are being inundated with consumers stocking up on staples, while others are empty. Weather was a factor because February was cold and January-December was warm in many parts of the country. The coronavirus is changing consuption. On net, consumption will likely fall. The big question is, by how much?

Industrial production increased 0.6% in February, following a 0.5% decline in January. Manufacturing advanced 0.1% in February, not quite offsetting a 0.2% decline in January. Durable goods production increased 0.3% in February, but nondurable goods output fell 0.1%. Motor vehicle ad parts output increased a decent 3.5% in February and 1.3% in January. Manufacturing, excluding the auto sector fell 0.2%. Business equipment production decreased 0.4% for the month and mining fell 1.5%. Utility output jumped 7.1% because of the cold. Manufacturing continues to struggle, and it won’t get any better because of COVID-19. The virus has disrupted global supply chains. Add Boeing’s struggles with the 737 MAX and manufacturing will continue to struggle the next few months. The plunge in oil prices will undermine mining and equipment investment. The good news is that oil accounts for about 18% of nominal fixed investment in nonresidential structures, compared to 35% before the slump in prices that began in the second half of 2014. The drag of low oil prices on real mining exploration will subtract about 0.15% from first quarter growth. Low oil prices won’t cause a recession, but they will add to weakness.

Business inventory build stumbled in January, contracting 0.1% for the month. Among categories, wholesalers were the weakest performer, falling 0. 4%. Retail inventories were flat and manufacturers slipped 0.1%. Business sales rose by 0.6% in January, following a 0.1% rise in December. The inventory-to-sales ratio fell from 1.39 to 1.38. For reference, the cycle low was 1.25 and the recession high was 1.49. Auto vehicles and parts inventories continue to decline. The I/S ratio was 2.2 months in January, versus 2.42 in January 2019. Demand for autos has passes its peak and inventory build will decline. The coronavirus has severely disrupted supply chains. The outlook of near-term production does not look favorable.

Existing home sales surged 6.5% in February, reversing the slight decline in January. Sales totaled a seasonal adjusted annualized total of 5.77 million homes in February, up from 5.42 million in January. The housing market was in decent shape before the advent of the coronavirus. After the virus fades, activity should rebound fueled by low mortgage rates. However, that will depend on how much damage is done to the U.S. labor market.

Important Data Releases This Week

The February Chicago Fed National Activity Index will be released on Monday, March 23 at 8:30 AM. The index will have little data that reflects the virus activity at home. It may have some inputs over supply chain disruptions from China in the trade sector. The index rose to -0.25 in January and a slight increase is projected for February. Domestic disruptions will appear in the March reading.

February new homes sales will be released on Tuesday, March 24 at 9:45 AM. Sales came in at 764,000 in January and we project a sight retreat to 750,000 for February.

February durable goods orders will be released on Wednesday, March 25 at 8:30 AM. The manufacturing sector continues to struggle and durable goods orders fell 0.2% in January. We project a 1% drop for February. The core orders sector saw a 1.1% advance in January, but will likely see a 0.5% drop for February.

Weekly jobless claims don’t usually gather a lot of attention, but on Thursday, March, many spotlights will be watching this sector closely. After jumping to 281,000 last week, a jump to 2.25 million will be expected.

February advance trade in goods will be released on Thursday, March 26 at 8:30 AM. We expect the goods deficit to fall from $65.2 billion to $63.5 billion for February.

February personal income and outlays will be released on Friday, March 27 at 8:30 AM. Personal income grew 0.6% in January and spending increased 0.2%. For February, we project a 0.4% advance for income and a 03% increase for spending. The GDP deflator will rise 0.3%, after the0.2% increase in January.

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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.