The Greatest Risk for the Economy Would Be Another Wave of Infections and a Pullback in Consumer Spending

By | June 15, 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.


Global shares pared losses on Friday while oi prices recovered some ground as fears of fresh lockdowns to combat the coronavirus faded. The three major stock indexes posted their worst day on Thursday since mid-March, when markets went into free-fall by the abrupt lockdowns put into place. A jump in coronavirus cases in some parts of the U.S. raised concerns among investors that said authorities moved too soon to loosen restrictions put in pace to combat the virus. Cases in Arizona, New Mexico and Utah rose by 40% during the week ending Sunday and Florida and Arkansas are other hot spots. 

The U.S. Federal Reserve released a gloomy economic outlook at the end of a two-day monetary policy meeting on Wednesday and Chairman Powell warned of a “long road” to recovery. However, investors were heartened by news that in Europe, mobility had picked up the number of new cases remain subdued. In the U.S., perceptions that new restrictive measures were not likely. This allowed the pan-European STOXX 600 to increase 1% on Friday, snapping a four-day losing streak. MSCI’s index of Asia-Pacific shares outside of Japan was 0.9% lower on Friday.

U.S. stocks ended higher on Friday as bargain hunters stepped back into the market following sharp losses the day before. All three major indexes were down for the week. The Dow Jones Industrial Average rose 477.37 points, or 1.9% to 25,605.54, the S&P 500 gained 39.21 pints, or 1.31% to 3,041.31 and the Nasdaq added 96.08 pits, or 1.01% to 9,588.81. For the week, the Dow ended down 5.6%, the S&P fell 4.8% and the Nasdaq shed 2.3%. The Federal Reserve’s indication earlier in the week of a long road to recovery and rising COVID-19 cases in the United States cast a pall over optimism about a quick economic rebound. The University of Michigan’s index of consumer confidence rose to a reading of 78.9 from 72.3 in May. However, the report said that “few consumers anticipate the reestablishment of favorable economic conditions anytime soon.” Two-thirds of consumers in the survey expected “bad times financially” during the year ahead. Although the economy created 2.5 million jobs in May, an employment gap of nearly 20 million remains since March. Layoffs are more than double their peak during the 2007-09 Great Recession.

Jobless claims continue to decline but the number of jobless remain at a high level. Initial claims for unemployment insurance benefits fell by 355,000 to 1.542 million in the week ending June 6. Filings for Pandemic Unemployment Assistance also declined from 797,000 to 706,000. Continuing claims also declined, falling by 339,000 to 20.929 million in the week ending May 30. This brought down the insured unemployment rate down from 14.6% to 14.4%. The reports do show that some progress is being made in the labor markets. However, the outlook is fraught with risk. A second wave of virus outbreaks could mean more lockdowns. Congress needs to maintain stimulus as the recovery may stall without further help. Without stronger final demand, the jobs of employees protected by the PPP program will be in danger. Businesses and families need help until the recovery becomes more sustaining.

Lockdowns have been lifted across most of the country and the total number of new coronavirus cases have been trending lower, but the flattening curve has not been consistent. While the total U.S. reported the slowest pace of new cases on Tuesday. The next day, Texas reported the highest umber of new cases since the pandemic began. Treasury Secretary Steven Mnuchin said the that U.S. cannot have another lockdown, but it is possible for local governments to issue stay-at-home orders. The greatest risk for the economy would be another wave of infections and a pullback in consumer spending. We still expect a gradual increase in economic activity. The road to recovery will likely be long, but a second wave of infections would make it longer.

Next week will be busy on the economic calendar. We get a look at retail sales, industrial production, business inventories, housing starts and building permits.

Latest Data

The U.S. Economy:

Construction spending decreased 2.9% in April after remaining unchanged in March. The decline was driven by a 4.5% contraction in residential outlays. Spending on new single homes fell 6.6% but did remain up 4.5% from a year earlier. Construction spending on new multi-family homes fell 9.1% and was 14.7% below a year earlier. Nonresidential construction spending fell 1.3% and was down 1.1% from April 2019. Public construction spending fell 2.5% but was up 0.8% from a year earlier. Construction spending took tumble in April but did perform better than expectations. Nonresidential investment held up better than expected in March and April but the future does not look good. Businesses have been hurt by shutdown of the economy and the jump in unemployment. Construction put in place is not likely to recover until mid-2021. There is some hope for the residential sector, as low rates and bank lending is not freezing up, like it did in the Great Recession. For those who still have a job, credit is still flowing.

U.S. small business confidence improved in May. The NFIB small business optimism index rose from 90.9 in April to 94.4 in May. While expectations for gains in real sales was particularly downbeat, the rest of the index improved. Expectations that the economy will improve is likely the efforts of businesses to reopen in May and expectations that the worst of the COVID-19 recession is behind us. Plans to increase employment rose to 8 from 1. Capital expenditure plans improved to 20 from 18. Efforts to keep in PPP guidelines likely heled emply6ment expectations. Plans to raise compensation increased from 7 to 10. Earnings trends fell to 26 from -20. In the Great Recession, the number of small businesses reporting credit is harder to get skyrocketed. This time around, the availability of credit to small businesses has been strong. The PPP program ad the Fed’s Man Street Lending Program is a help for small businesses trying to recover.

Wholesale inventories increased 0.3% in April, following a revised 1.1% drop in March. Durable goods inventories decreased 0.3%, while nondurable goods increased 1.1%. Wholesale sales fell off a cliff in April, declining 16.9 after a 5.1% decrease in March. The inventory-to-sales ratio jumped to 1.65, a record from 1.36 in March. Bankruptcies and business failures will disrupt supply chains. The worst of the shutdowns are behind us. Changes in consumption will disrupt inventory levels for several months. 

The producer price index increased 0.4% in May, following a 1.3% decline in April. Final demand goods prices were up 1.6% in May while service prices slipped 0.2%. The bulk of the increase in May came from meat prices was attributed to meat prices, which jumped 40.4%. Final demand PPI was down 0.8% from a year earlier, while core goods was up 0.2%. The CPI fell 0.1%in May following the 0.8% decline in April. Excluding food and energy, the CPI also declined 0.1%. Food prices increased 0.7% in May after rising 1.5% in April. The CPI was up 0.2% from a year earlier, while the core index was still up 1.2%. COVID-19 s an deflationary event, but the Fed will want to keep inflationary expectations anchored near their desirable level. The Fed will keep up its stimulus efforts to up-start the economy back to levels strong enough to support a little inflation and avoid a deflationary trap. 

Important Data Releases This Week

May retail sales will be released on Tuesday, June 16 at 8:30 AM. Retail sales decreased 16.4% in April and we expect a May increase, but that does not say that consumer spending is anywhere close to were it was before the pandemic. Sales equaled $525 billion annual basis in February and fell to $483 billion in March and dropped to $404 billion in April before the May increase. Sales are expected to rise 7% in May.

The May industrial production index will be released on Tuesday, June 16 at 9:15 AM.  Industrial production came to a screeching halt in April, falling 11.2%. Factories started reopening in May but the start-up pace was slow and mainly occurred in late-May. Industrial activity likely fell another 3% in May but should post positive results for June. Demand destruction has been widespread on a global level, meaning it will be a long road for recovery in the industrial sector.

The April business inventories will be released on Tuesday, June 16 at 10:00 AM.  Inventories fell 0.2% in March as factories started to close. We expect stocks to increase 0.4% in April but sales will have fallen deeply raising the inventory-to-sales ratio sharply.

The May housing starts report will be released on Wednesday, June 17 at 8:30 AM. Housing is one of the strongest sectors of the coronavirus economy. Mortgage applications have more than completed a v-shaped recovery, driven by low interest rates and Millennial demand. Single-family construction should pick up nicely, but the multifamily will be weaker because of job losses among renters. Housing starts should pick up to an annual pace of 1.137 million units in May, up from 891,000 in April.

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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.