An Uneven Path to Recovery

While some key measures rose, many say a cloud of uncertainty will abide for the remainder of the year
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Grace Schmidt of Life Industries expects the economy to bounce back from the pandemic.

Grace Schmidt of Life Industries expects the economy to bounce back from the pandemic.

A closely followed measure of consumer confidence edged up slightly in May but remained at a low level as the country continued to deal with the deadly covid-19 pandemic and as state economies gradually began to reopen.

The Conference Board says its Consumer Confidence Index rose to 86.6 from a revised 85.7 in April. The index fell 33 points in April.

“Following two months of rapid decline, the free fall in confidence stopped in May,” Lynn Franco, senior director of economic indicators at The Conference Board, stated in a press release. “The severe and widespread impact of covid-19 has been mostly reflected in the Present Situation Index, which has plummeted nearly 100 points since the onset of the pandemic. Short-term expectations moderately increased as the gradual reopening of the economy helped improve consumers’ spirits.

“However,” she added, “consumers remain concerned about their financial prospects. In addition, inflation expectations continue to climb, which could lead to a sense of diminished purchasing power and curtail spending. While the decline in confidence appears to have stopped for the moment, the uneven path to recovery and potential second wave are likely to keep a cloud of uncertainty hanging over consumers’ heads.”

Another key measure of consumer confidence also rose slightly from recent steep declines. The University of Michigan reported that its Consumer Sentiment Index climbed to 72.3 in May from 71.8 in April.

“The CARES [Act] relief checks and higher unemployment payments have helped to stem economic hardship, but those programs have not acted to stimulate discretionary spending due to uncertainty about the future course of the pandemic,” Richard Curtin, chief economist of the university’s Surveys of Consumers, stated in a press release. “It should not be surprising that a growing number of consumers expected the economy to improve from its recent standstill, or that the majority still thought conditions in the economy would remain unfavorable in the year ahead. This has been a common occurrence in past cycles.

“The gap between economic growth and the current performance of the economy is likely to grow significantly when the disastrous second-quarter GDP is announced,” Curtin added. “More widespread price discounting, as well as low interest rates, have helped to improve buying plans, but those plans still remain well below the levels recorded three months ago.”

Numerous marine companies have been adapting as the pandemic continues. Grace “Louise” Schmidt, president of Life Industries Corp., which makes caulking, sealants, cleaners and more under the BoatLIFE brand in North Charleston, S.C., says the company “temporarily switched our manufacturing over to Sanitizer, a disinfectant solution. The result is that we have been so busy, we had to double our production staff.”

Schmidt says that sourcing sufficient packaging supplies “has created quite a challenge during the pandemic. However, we increased our customer base by more than 10 percent.”

Schmidt says she expects the economy to rebound well from the pandemic. She is watching unemployment claims and job gains, consumer confidence, the financial markets and political events.

“I believe the economy has a firm foundation, and although some segments have been struggling, I do see a strong and rapid comeback,” she says. “Based on the number of inquiries and orders we are receiving, I would say the opportunity for success and expansion will continue.

“My key indicators are [stock] market trends,” she adds. “I believe the market will pick up where it left off and even surge a little to make up for the lost months. Most informed people realize this is only a temporary situation and not a terminal condition.”

Schmidt says the company’s export sales were up substantially last year, and President Trump’s tariffs have had no direct effect on her company, “as we source all of our materials from domestic manufacturers, whenever possible.”

Notwithstanding bright spots that companies like Schmidt’s are seeing, overall consumer spending fell by a record amount in April, dropping 13.6 percent, according to the U.S. Department of Commerce. Lockdowns at many businesses made it difficult for Americans to spend the government stimulus money they received.

Personal incomes, conversely, rose by a record 10.5 percent because of the stimulus payments. Many people also were receiving unemployment benefits after their locked-down employers laid them off.

“Unemployment insurance only offsets less than half of the loss in compensation,” Michelle Meyer, head of U.S. economics at Bank of America Corp., told Bloomberg. “The reason the numbers look so extreme this month was because of the one-time checks that were sent out — which won’t be continuing.”

Inflation was very much under control in April. The Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred inflation gauge, fell 0.5 percent. The core index, which excludes the volatile food and energy sectors, was down 0.4 percent.

The Conference Board’s Leading Economic Index fell 4.4 percent in April, to 98.8, after a 7.4 percent decline the previous month.

“In April, the U.S. LEI continued on a downward trajectory, after posting the largest decline in its 60-year history in March,” Ataman Ozyildirim, senior director of economic research at The Conference Board, stated in a press release. “The erosion has been very widespread, except for stock prices and the interest rate spread, which partially reflect the rapid and large response of the Federal Reserve to offset the pandemic’s impact and support financial conditions. The sharp declines in the LEI and [Coincident Economic Index] suggest that the U.S. economy is now in recession territory.”

Bart van Ark, chief economist at The Conference Board, stated in the release that “the breadth and depth of the decline in the LEI suggests that an imminent reopening of some sectors does not imply a fast rebound for the economy at large.”

In a webinar hosted by Princeton University on May 29, Federal Reserve Board chairman Jerome Powell said he was satisfied with the central bank’s strong response to the economic effects of the pandemic. Cutting interest rates to near zero was among the Fed’s dramatic moves.

“We crossed a lot of red lines that had not been crossed before, and I’m very comfortable that this is that situation in which you do that and then you figure it out afterward,” Powell said.

The Fed chief said the covid-19 crisis was having a disproportionately large economic impact on lower-income workers.

“If you were someone who made $40,000 or less annually, the chances of your being laid off in the last month or so approached 40 percent,” Powell said. “So almost 40 percent of those people have lost a job.”

The mood among small businesses continued to darken in April. The Small Business Optimism Index of the National Federation of Independent Business fell 5.5 points, to 90.9. The index has fallen 13.6 points in a two-month period.

The NFIB reported that business owners expect the economy to weaken in the short term but improve during the next six months.

“The impact from this pandemic, including government stay-at-home orders and mandated nonessential business closures, has had a devastating impact on the small business economy,” NFIB chief economist William Dunkelberg stated in a press
release. “Owners are starting to benefit from the [Paycheck Protection Program] and [Economic Injury Disaster Loan] small business loan programs as they try to reopen and keep employees on staff. Small business owners need more flexibility, though, in using the PPP loan to support business operations and liability protection so that all these efforts to support small businesses are not ultimately lost in costly litigation.”

The housing sector showed a small sign of recovery when the National Association of Home Builders reported that builder confidence in the market for newly built single-family homes increased seven points, to 37, in May.

The increase in builder sentiment followed a 42-point drop in April that was the largest single decline in the history of the NAHB/Wells Fargo Housing Market Index.

“The fact that most states classified housing as an essential business during this crisis helped to keep many residential construction workers on the job, and this is reflected in our latest builder survey,” NAHB chairman Dean Mon stated in a press release. “At the same time, builders are showing flexibility in this new business environment by making sure buyers have the knowledge and access to the homes they are seeking through innovative measures such as social media, virtual tours and online closings.”

NAHB chief economist Robert Dietz stated in a press release that “low interest rates are helping to sustain demand. As many states and localities across the nation lift stay-at-home orders, and more furloughed workers return to their jobs, we expect this demand will strengthen. Other indicators that suggest a housing rebound include mortgage application data that has posted four weeks of gains, and signs that buyer traffic has improved in housing markets in recent weeks. However, high unemployment and supply-side challenges, including builder loan access and building material availability, are near-term limiting factors.”

All of the HMI’s indices showed gains in May. The index that gauges current sales conditions increased six points, to 42; the component that measures sales expectations in the next six months jumped 10 points, to 46; and the measure that charts traffic of prospective buyers rose eight points, to 21.

Sales of new single-family homes rose slightly in April, by 0.6 percent, to an annual rate of 623,000, the Commerce Department reported. This development follows a decline of 13.7 percent in March as the pandemic kept many people hunkered down because of school and business closings.

Although sales were higher than in March, they were 6.2 percent lower than in April of last year.

The National Association of Realtors reported that sales of existing homes dropped sharply in April, marking the second month in a row of slower sales during the pandemic. Sales fell 17.8 percent from March to a seasonally adjusted annual rate of 4.33 million. The April decline was the largest month-over-month drop since July 2010.

“The economic lockdowns, occurring from mid-March through April in most states, have temporarily disrupted home sales,” Lawrence Yun, the NAR’s chief economist, stated in a press release. “But the listings that are on the market are still attracting buyers and boosting home prices.”

The median existing-home price in April was $286,800, up 7.4 percent from the same month a year earlier, as prices increased in every region of the country. The price increase marks 98 straight months of year-over-year gains.

“Record-low mortgage rates are likely to remain in place for the rest of the year and will be the key factor driving housing demand as state economies steadily reopen,” Yun says. “Still, more listings and increased home construction will be needed to tame price growth.”

This article was originally published in the July 2020 issue.

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