HIGHLIGHTS OF THE WEEK
- The S&P 500 is on track to end the week flat, erasing some earlier momentum as economic data and earnings reports released throughout the week revealed the extent of the pandemic’s impact.
- The U.S. economy contracted by 4.8% annualized in the first quarter, ending the longest economic expansion in its history. The stage is set for an even steeper decline in the second quarter due to longer and broader shutdowns.
- The Federal Reserve left its policy rate unchanged at the 0 to 0.25 percent target range this week. It reaffirmed its ongoing commitment to support the economy.
COVID-19 Ends the Longest Expansion in U.S. History
Financial markets erased some of their earlier momentum this week as economic data and earnings reports released throughout the week showed the pandemic’s impact. As of writing, the S&P500 is on track to end the week flat. The index ended a turbulent month of April up by 12.7%, but is still down about 10% on the year.
As the number of COVID-19 fatalities breached 60,000 in the U.S., the devastating impact of the pandemic was on full display in economic data released throughout this week. First quarter GDP contracted by 4.8% annualized, ending the longest economic expansion in the history of the United States (Chart 1). The details were as stark as the headline number suggests, with a contraction in personal consumption expenditures and non-residential fixed investment the biggest drags on GDP. Bucking the trend was residential investment, which advanced by 23.5% annualized as a spell of unusually warm weather helped to lift construction activity at the outset of the year. The stage is set for a steeper GDP decline in the second quarter, considering that shutdowns only went into full effect around mid-March.
The hit to consumer spending, which represents roughly two-thirds of economic output, was even more evident in the March personal income and spending data. Personal spending declined by 7.5% month-on-month in March, the largest single-month contraction on record (Chart 2). Personal income fell by a more moderate 2%, weighed down by a decline in compensation. With over 20 million Americans filing for unemployment benefits since the beginning of April, the hit to spending will worsen in the near-term. A sliver of good news was that the number of initial jobless claims declined for the third straight week, but still topped 3.9 million last week. Looking ahead, next week’s employment data release for the month of April promises to be one for the history books, with the unemployment rate likely to be well into the double-digits.
Elsewhere, manufacturing sentiment continued to weaken in April as the ISM Manufacturing Index dove deeper into contractionary territory at 41.5. The declines were broad-based across sub-indices, with new orders, production and employment recording the largest drops. By contrast, a strengthening in supplier deliveries prevented the index from falling further. This increase, however, points to supply shortages rather than stronger demand. Going forward, an increasing number of states looking to ease virus-containment orders in the coming weeks should eventually provide a fillip to the manufacturing sector. Boeing and BMW, for instance, will be reopening their manufacturing plants on May 4 with enhanced safety protocols.
With large swaths of the economy currently in the doldrums, policymakers remain on high alert. During its scheduled policy statement this week, the Fed left the federal funds rate unchanged at 0 to ¼ percent. Importantly, it reaffirmed its ongoing commitment to support the economy. It also expanded its Main Street Lending Program by allowing larger businesses to participate and lowering the minimum-loan requirements to help more small businesses. Such continued support will be much needed to help bolster the chance of a successful economic rebound in the months ahead.
Johary Razafindratsita, Economist | 416-930-7126w
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