An Economic About-Face

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We’re grounded,” says Clayton Smith of Waters & David Co., “We cannot visit customers at this time.”

We’re grounded,” says Clayton Smith of Waters & David Co., “We cannot visit customers at this time.”

An important measure of consumer confidence fell sharply in March, and the United States lost 701,000 jobs as businesses laid off workers during government-mandated shutdowns to try and stop the spread of covid-19.

The Conference Board reported that its Consumer Confidence Index declined to 120 from 132.6. “Consumer confidence declined sharply in March due to a deterioration in the short-term outlook,” Lynn Franco, senior director of economic indicators at The Conference Board, stated in a press release. “The Present Situation Index remained relatively strong, reflective of an economy that was on solid footing, and prior to the recent surge in unemployment claims. However, the intensification of covid-19 and extreme volatility in the financial markets have increased uncertainty about the outlook for the economy and jobs. March’s decline in confidence is more in line with a severe contraction — rather than a temporary shock — and further declines are sure to follow.”

Consumers were pessimistic about the short-term outlook. The percentage of consumers who expect business conditions to improve during the next six months fell from 20.6 percent to 18.2 percent; those who expect business conditions to worsen rose from 7.2 percent to 14.9 percent.

A separate measure of confidence also plunged in March. The University of Michigan’s Consumer Sentiment Index dropped to 89.1 from 101 the previous month.

“Consumer sentiment dropped 11.9 index points in March, the fourth-largest one-month decline in nearly a half century,” Richard Curtin, chief economist for the university’s Surveys of Consumers, stated in a press release.

Curtin reported that the index declined 11.8 points in August 1990 in reaction to the Persian Gulf War, then had a record gain of 17.3 points in March 1991. “Those two outsized changes in the Sentiment Index defined the start and end of the 1990-91 recession,” Curtin stated in late March. “Just as in the 1990-91 episode, the Sentiment Index can be expected to decline in the months ahead.

“If the Consumer Sentiment Index were to stabilize at its most recent seven-day average, it would imply an additional decline of nearly 18.2 index points in April, which would amount to a record-setting two-month decline of 30.1 points,” Curtin added.

“Stabilizing confidence at its [March-ending] level will be difficult, given surging unemployment and falling household incomes. The extent of additional declines in April will depend on the success in curtailing the spread of the virus and how quickly households receive funds to relieve their financial hardships. Mitigating the negative impacts on health and finances may curb rising pessimism, but it will not produce optimism. There is no silver bullet that could end the pandemic as suddenly as the military victory that ended the Gulf War.”

The U.S. Department of Labor reported that the unemployment rate rose to 4.4 percent in March from 3.5 percent in February. Employment in the leisure and hospitality category fell by 459,000, mainly in food services and drinking establishments that cut back staff or closed. The government also reported “notable” declines in health care (43,000 in offices of physicians, dentists and other practitioners) and social assistance (19,000), professional and business services (52,000), retail trade (46,000), and construction (29,000).

“[The March] numbers are shockingly bad, and an understatement of the damage already done to the U.S. economy,” Nick Bunker, economic research director at the job search site Indeed, told CNBC. “If this is an indication of what was happening before the full force of the crisis hit, then it will be hard to come up with the words to describe the numbers in future months.”

Mark Zandi, chief economist at Moody’s Analytics, told CNBC: “My sense is that when we get April data … we’ll see that the economy lost somewhere between 10 and 15 million jobs. That would be consistent with the initial claims for unemployment insurance data that we’re getting.”

The Labor Department reported that workers’ average hourly earnings rose 11 cents, to $28.62, in March. Earnings have risen 3.1 percent during the past year.

Clayton Smith, a partner at the manufacturers’ representative group Waters & David Co. in New Orleans, said March 31 that it was too soon to tell how bad the economic effects of the pandemicwould be on the company, but he expected May and June to be particularly tough.

On the recreational side, Waters & David represents parts manufacturers for trailerable boats 25 feet and smaller. The company’s territory consists of Louisiana, Alabama, Mississippi, Arkansas, Texas, Oklahoma and the Florida Panhandle. Smith is a former president of the National Marine Representatives Association.

“We’re grounded,” says Smith, who works from his home in Dallas. “We cannot travel. We cannot visit customers at this time. Everyone is working from home. I think even our office manager is working from home.”

Smith says 2019 was Waters & David’s best year ever, and 2018 wasn’t far behind. This year, he says, business was up in January and flat in February before the covid-19 crisis began in March.

“The longer this goes on, the longer it will take for a recovery,” he says, adding that he generally watches the housing market, consumer confidence, and oil and gas prices as indicators for the boating industry. “If the housing market crashes, consumer confidence will follow, and boating will decline.”

He says President Trump’s tariffs have helped Waters & David’s customers that manufacture in the United States. “The companies we represent were doing well, running two or three shifts,” he says.

Ahead of the pandemic, the U.S. Commerce Department reported that consumer spending rose 0.2 percent in February. Households spent more on electricity and gas. Personal income rose 0.6 percent in February for the second month in a row.

Inflation was tame. The core Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred inflation gauge, inched up in February to a rate of 1.8 percent from 1.7 percent the previous month.

The Conference Board reported that its Leading Economic Index edged up 0.1 percent in February, to 112.1, after a 0.7 percent increase in January and a 0.3 percent decline in December. The index attempts to predict future economic activity.

“The U.S. LEI rose slightly in February, but it doesn’t reflect the impact of the covid-19 pandemic, which began to hit the U.S. economy in full by early March,” Ataman Ozyildirim, senior director of economic research at The Conference Board, stated in a press release. “The slight gain in February came only from half of the LEI components. In particular, the recovery in manufacturing, which looked promising until February, will now be short-lived because of the disruption in global supply chains and falling demand.

Confidence among small businesses rose slightly in February ahead of the coronavirus pandemic. The National Federation of Independent Business Optimism Index was up 0.2 points, to 104.5.

“The small business economic expansion continued its historic run in February, as owners remained focused on growing their businesses in this supportive tax and regulatory environment,” NFIB chief economist William Dunkelberg stated in a press release. “February was another historically strong month for the small business economy, but it’s worth noting that nearly all of the survey’s responses were collected prior to the recent escalation of the coronavirus outbreak and the Federal Reserve rate cut. Business is good, but the coronavirus outbreak remains the big unknown.”

In the housing market, builder confidence in the market for newly built single-family homes fell two points, to 72, in March, on the National Association of Home Builders/Wells Fargo Housing Market Index. “Builder confidence remains solid, although sales expectations for the next six months dropped four points on economic uncertainty stemming from the coronavirus,” NAHB chairman Dean Mon stated in a press release. “Interest rates remain low, and a lack of inventory creates market opportunities for single-family builders.”

NAHB chief economist Robert Dietz added: “It is important to note that half of the builder responses in the March HMI were collected prior to March 4, so the recent stock market declines and the rising economic impact of the coronavirus will be reflected more in [the April] report. Overall, 21 percent of builders in the survey report some disruption in supply due to virus concerns in other countries such as China. However, the incidence is higher — 33 percent — among builders who responded to the survey after March 6, indicating that this is an emerging issue.”

The HMI index that gauges current sales conditions fell two points, to 79, in March; the component that measures sales expectations during the next six months dropped four points, to 75; and the gauge that charts the traffic of prospective buyers fell one point, to 56.

Any number over 50 on the HMI indexes indicates that more builders see conditions as good rather than poor.

The U.S. Department of Housing and Urban Development reported that sales of newly built, single-family homes fell 4.4 percent, to a seasonally adjusted annual rate of 765,000 units, in February from January.

The NAHB reported that the February rate was still 14.3 percent higher than the February 2019 pace, and the January and February readings this year marked the highest monthly sales paces since July 2007.

“Sales were on solid footing as we entered 2020, but this could be the high-water mark for the next few months as consumers contend with the coronavirus outbreak,” Mon stated in a March 24 press release.

Gregory Daco, chief U.S. economist at Oxford Economics in New York, told Reuters: “We expect new home sales to fall more sharply in March and decline nearly 10 percent in the second quarter. Low mortgage rates and pent-up demand will be supportive of housing when a recovery is underway, but severe job losses and damage to household confidence may make a quick bounce-back difficult.”

In a statement released April 3 on the effect of covid-19, Dietz wrote, “The acceleration of job losses and sudden stop associated with economic output imply significant declines for home construction and remodeling during the middle of 2020. However, construction continues to move forward on the majority of the 539,000 single-family homes and 671,000 apartments now in the construction pipeline.”

In the home resale market, the National Association of Realtors says sales of existing homes rose 6.5 percent in February from January, to a seasonally adjusted annual rate of 5.77 million.

The national median existing-home price was $270,100 in February, up 8 percent from a year earlier. It marked the 96th consecutive month of year-over-year gains.

“February’s sales of over 5 million homes were the strongest since February 2007,” Lawrence Yun, the NAR’s chief economist, stated in a press release. “I would attribute that to the incredibly low mortgage rates and the steady release of a sizable pent-up housing demand that was built over recent years.”

Yun was encouraged by February’s sales, but notes that they did not reflect the turmoil in the financial markets or the damage the economy is expected to have from covid-19.

“These figures show that housing was on a positive trajectory, but the coronavirus has undoubtedly slowed buyer traffic, and it is difficult to predict what short-term effects the pandemic will have on future sales,” he stated.

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