‘Uncertain Path’ Hinges on State of Covid

Fed chairman says the pandemic and its fallout are “biggest shock to the U.S. economy in living memory”
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Jonathan Sherman

Jonathan Sherman

A key measure of consumer confidence dropped in July as Covid-19 cases multiplied in many states, depressing consumers who had seemed to be growing more optimistic a month earlier. The Conference Board reported that its Consumer Confidence Index fell from a reading of 98.3 in June to 92.6 in July.

“Consumer confidence declined in July following a large gain in June,” Lynn Franco, senior director of economic indicators at The Conference Board, stated in a press release. “The Present Situation Index improved, but the Expectations Index retreated. Large declines were experienced in Michigan, Florida, Texas and California, no doubt a result of the resurgence of Covid-19.

“Looking ahead,” Franco added, “consumers have grown less optimistic about the short-term outlook for the economy and labor market, and remain subdued about their financial prospects. Such uncertainty about the short-term future does not bode well for the recovery, nor for consumer spending.”

Separately, another important measure of consumer confidence slipped in July. The University of Michigan’s Consumer Sentiment Index declined from 78.1 in June to 72.5 in July.

“Consumer sentiment sank further in late July due to the continued resurgence of the coronavirus,” Richard Curtin, chief economist of the university’s Surveys of Consumers, stated in a press release. “In the last four months, the Sentiment Index has remained trendless, averaging 73.7, a decline of 25 percent from the same period in 2019. The Expectations Index fell back to 65.9 in July, tied with the six-year low recorded in May, providing no indication that consumers expect the recession to end anytime soon.

“While the third-quarter GDP is likely to improve over the record-setting second-quarter plunge, it is unlikely that consumers will conclude that the recession is anywhere near over,” Curtin added. “The federal relief programs have prevented more substantial declines in consumer finances, partially shielding consumers from the unprecedented surge in job losses, reduced work hours and salary cuts.”

The U.S. economy added just 1.8 million jobs in July, with Covid-19 infections skyrocketing in such states as Texas and Florida. Unemployment fell to 10.2 percent in July, topping expectations but maintaining an historically high rate, the Labor Department reported.

Jonathan Sherman, president of compass manufacturer Ritchie Navigation in Pembroke, Mass., says that overall, he believes the U.S. economy is still healthy “based on where we were before Covid-19. Of course, some industries are getting hammered while others are seeing additional discretionary dollars find their way into their industry. While I’m out and about, I see people spending money.”

Sherman says Ritchie has 50 employees and sells heavily into the aftermarket and OEM sides of the marine accessories segment. “Right now, our business is booming, and we’re on pace for a July like we haven’t seen since prior to 2008,” Sherman says. “May and June were also very strong months for us.”

Sherman says the pandemic has affected the way the company does its work. “We’ve implemented all the safety precautions to meet the guidelines set in place by our local government,” he says. “Everyone is still doing what needs to be done to build product, but now it looks a little different.”

The domestic market has snapped back faster than the market for exports, he says, and tariffs haven’t really affected the business because most of the parts the company uses to manufacture products in Massachusetts are sourced locally or elsewhere in the United States.

He says that overall, he is confident the economy will start growing again, creating opportunities.

“I no longer think this is the season shifting ahead two months,” Sherman says. “The activity Ritchie is seeing in July, along with my discussions with retailers and distributors, tells me that we’ve received a boost, and it won’t just be short-term. As a boater who has been on the water, at launches and in the stores, I think this is undeniable.”

He adds: “The questions I’m trying to answer are, are the boaters out on the water and spending the money upgrading or investing in new equipment? And of course, are new boaters getting into our recreation? Right now, I like what I’m seeing for both.”

His instincts about consumer spending align with the latest information from the U.S. Department of Commerce, which reported that consumer spending rose for the second month in a row in June, climbing 5.6 percent after a record 8.5 percent advance in May. Consumers spent more on clothes and footwear, among other items.

“The June data confirm the strong initial phase of the recovery, but we caution that rearview mirror economics could drive us off a cliff,” Gregory Daco, chief U.S. economist at Oxford Economics in New York, told Reuters. “Low-income families have nearly regained pre-Covid spending levels supported by strong fiscal aid, but with numerous assistance programs expiring, and a mismanaged health crisis constraining spending on services, the second phase of the recovery will likely be much slower.”

Inflation remained tame, as the Personal Consumption Expenditures Price Index, excluding the volatile food and energy categories, rose just 0.2 percent in June. During the 12-month period through June, the core PCE price index rose 0.9 percent after rising 1 percent in May. The core PCE index is the Federal Reserve’s preferred inflation gauge.

The Conference Board’s Leading Economic Index rose 2 percent in June, to 102, after a 3.2 percent increase in May. The index attempts to predict future economic activity.

“The June increase in the LEI reflects improvements brought about by the incremental reopening of the economy, with labor market conditions and stock prices in particular contributing positively,” Ataman Ozyildirim, senior director of economic research at The Conference Board, stated in a press release. “However, broader financial conditions and the consumers’ outlook on business conditions still point to a weak economic outlook. Together with a resurgence of new Covid-19 cases across much of the nation, the LEI suggests that the U.S. economy will remain in recession territory in the near term.”

At the end of July, the Federal Reserve kept its benchmark interest rate close to zero and said the rate would remain there until employment and inflation picked up. Fed chairman Jerome Powell said the sharp increase in coronavirus infections since mid-June was hampering the economy’s ability to recover.

“The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in keeping the virus in check,” Powell said. “This pandemic and its fallout really represents the biggest shock to the U.S. economy in living memory.”

Powell also said the Fed was committed “to using our full range of tools to support the economy and help assure that the recovery from this difficult period will be as robust as possible.”

The mood among the nation’s small businesses improved in June. The National Federation of Independent Business reported that its Small Business Optimism Index rose 6.2 points, to 100.6, as owners continued to be optimistic about future business conditions and expected the recession to be short-lived.

“Small businesses are navigating the various federal and state policies in order to reopen their business, and they are doing their best to adjust their business decisions accordingly,” NFIB chief economist Bill Dunkelberg stated in a press release. “We’re starting to see positive signs of increased consumer spending, but there is still much work to be done to get back to precrisis levels.”

Home builders were also more optimistic. The National Association of Home Builders reported that builder confidence in the market for newly built single-family homes jumped 14 points to 72 in July, according to the NAHB/Wells Fargo Housing Market Index. The gain boosted builder confidence to the prepandemic level of March.

“Builders are seeing strong traffic and lots of interest in new construction as existing home inventory remains lean,” NAHB chairman Chuck Fowke stated in a press release. “Moreover, builders in the Northeast and the Midwest are benefiting from demand that was sidelined during lockdowns in the spring. Low interest rates are also fueling demand, and we expect housing to lead an overall economic recovery.”

NAHB chief economist Robert Dietz stated in the release: “While the housing market is clearly rebounding, challenges exist. Lumber prices are at a two-year high, and builders are reporting rising costs for other building materials while lot and skilled labor availability issues persist. Nonetheless, the important story of the changing geography of housing demand is benefiting new construction. New-home demand is improving in lower-density markets, including small metro areas, rural markets and large metro exurbs, as people seek out larger homes and anticipate more flexibility for telework in the years ahead. Flight to the suburbs is real.”

The NAHB reported that all of the Housing Market Index indices advanced in July. The index that gauges current sales conditions jumped 16 points, to 79; the component that measures sales expectations in the next six months rose seven points, to 75; and the measure that charts traffic of prospective buyers posted a 15-point gain, to 58. Any number above 50 indicates that more builders see conditions as good rather than poor.

Sales of new single-family homes rose strongly for the second successive month in June. The Commerce Department reported that sales rose 13.8 percent, to a seasonally adjusted annual rate of 776,000, the highest in 13 years.

Existing-home sales also improved. The National Association of Realtors reported that sales leaped 20.7 percent from May, to a seasonally adjusted annual rate of 4.72 million in June. NAR said the gain followed three straight months of lower sales as the pandemic depressed the market.

“The sales recovery is strong, as buyers were eager to purchase homes and properties that they had been eyeing during the shutdown,” Lawrence Yun, the NAR’s chief economist, stated in a press release. “This revitalization looks to be sustainable for many months ahead as long as mortgage rates remain low and job gains continue.”

The median existing-home price in June was $295,300, up 3.5 percent from the same month a year earlier, as prices rose in every region of the country. The June price increase marks 100 straight months of year-over-year gains. 

This article was originally published in the September 2020 issue.

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