HIGHLIGHTS OF THE WEEK
- Financial markets optimism faded this week as economic data continued to show the severe damage caused by COVID-19 and social distancing protocols.
- Closures of non-essential businesses all around the country, coupled with mounting job losses, resulted in retail sales plummeting by 16.4% in April, a record drop. Consumer prices responded accordingly, declining by 0.8% on the month.
- As states reopen, the economy will improve, but, as Chairman Powell noted in a speech this week, it will take time. Hopefully, April is the lowest point during this crisis.
Pandemic Wipes Out Nearly All Job Gains Of Past Decade
Equity markets took it on the chin this week as last week’s optimism faded. Investors continue to digest the extent of the damage COVID-19 and social distancing protocols are having on the economy. At the time of writing, markets were down 3% from close last week.
The impact of COVID-19 was on full display in economic data released this week. Retail sales plummeted by 16.4%, a decline never seen before in the history of the series. The extraordinary drop took retail sales to 2012 levels in April, wiping out 8 years of gains (Chart 1). Closures of non-essential businesses all around the country coupled with price declines and mounting job losses explain the sharp drop in sales in the month.
With respect to prices, the consumer price index (CPI) showed prices in April fell by 0.8% month-on-month, the largest monthly decline since December 2008. While the collapse in gasoline prices (-20.6%) was the main driver, prices also retreated in areas most affected by COVID-19: motor vehicle insurance, airline fares, and apparel. Core CPI inflation was 1.4% in year-over-year terms, down from 2.1% in March.
Given all the economic turmoil, business sentiment also worsened as the NFIB small business optimism index fell by 5.5 points to 90.9 in April. Small businesses grew more pessimistic across nearly all sub-indices. Interestingly, however, there was a large increase in the percentage of firms expecting the economy to improve in the next six months (April: 29%; March: 5%), coinciding with the news that states are gradually re-opening their economies. But, gradual restarts of state economies do not mean economic activity will rapidly return to normal.
This was the sentiment expressed by Federal Reserve Chairman Jerome Powell in a speech on Thursday. Chairman Powell said words couldn’t describe the damage this has done to households, especially for those at the lower-end of the income spectrum. As we have written in an earlier report, the poorest households are bearing the biggest economic burden of COVID-19. Quoting results of a Fed survey released yesterday, Chairman Powell noted that almost 40% of households making less than $40,000 a year had a member lose a job in March.
The aforementioned Fed survey also included slivers of hope for a sturdier economic recovery. Nine in ten people who lost a job said that their employer indicated that they would return to their job at some point, indicating that programs such as the Paycheck Protection Program are working.
April might be the lowest point for the U.S. economy. A gradual relaxation of social distancing protocols should see activity improve. China, the country furthest ahead in the battle against COVID-19, saw industrial production and investment bounce back into positive territory for the first time this year in April (Chart 2). If this is any indication for the future path of the U.S. economy, a recovery is coming, hopefully sooner rather than later.
Sri Thanabalasingam, Senior Economist | 416-413-3117
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