July 9, 2020 Reading Time: 15 minutes

While signs of rebound in some measures of economic activity have started to emerge, the more traditional business cycle indicators that make up AIER’s Business Cycle Conditions indexes remain weak. The Leading Indicators index – made up of 12 indicators that have historically been leading signs of pending business cycles – remained at 0 in June. The Roughly Coincident Indicators index also held at 0 while the Lagging Indicators index dropped to 33, the lowest result since 2010 (see chart). The latest results provide conclusive evidence of the widespread devastation caused by the COVID-19 outbreak and policy responses implemented to contain the spread of the disease.

Despite the devastation to the economy, there are reasons to be optimistic. The unique nature of the current recession – self-inflicted policy wounds – requires a unique view of current conditions. The focus needs to be three-fold. First, the progress of the outbreak as well as progress in developing an effective treatment and a vaccine. Second, responses by consumer, businesses, and policymakers to the rapidly changing environment. Third, identifying areas that can and do rebound versus those that may be burdened with longer-lasting damage, enduring new or accelerating pressures for structural change, or facing new regulatory burdens. Developments in all three areas will be critical to the medium-term path of the economy.

While significant damage has been done to many industries, some parts of the economy are rebounding as restrictions are lifted. However, complete recovery is likely to take a significant amount of time. Further complicating the outlook is the resurging number of new cases and the potential for additional declines in employment, spending, and investing, especially if the pace of easing lockdown restrictions is slowed or reversed.

AIER Leading Indicators index remains at zero in June

The AIER Leading Indicators index held at 0 for the second month in a row in June. The back-to-back zeros were the first pair of bottom readings since January and February 1991. The last time the Leading Indicators index posted more than two months at the lower bound was a three-month run from April through June 1980. The index has never stayed at zero for more than three consecutive months.

The Roughly Coincident Indicators index also remained 0 in June. The last time the coincident indicators index spent multiple months at zero was in 2008-09 when the index spent a total of 11 consecutive months at the bottom. The index spent five months at zero in 1991 and four months there in 1981-82.

AIER’s Lagging Indicators index retreated to a 33 in June from 42 in May. One indicator, real private nonresidential construction expenditures, changed trend in June, weakening from a neutral trend to a negative trend. Overall, two indicators were trending higher while four had unfavorable trends, and none were neutral.

Overall, the extremely weak results for both the Leading Indicators index and the Roughly Coincident Indicators index confirm the economy is in recession. However, signs of rebound are emerging and are likely to help boost some of the business cycle indicators out of their unfavorable trends in coming months. Government mandates for shuttering of nonessential businesses and sheltering-in-place for workers and consumers are in the process of being eased, providing support for the emerging recovery, though the resurgence of COVID-19 cases in many areas of the country pose a threat to the nascent recovery.

Labor market recovery has begun

U.S. nonfarm payrolls posted a second monthly gain in June, adding 4.8 million jobs following a 2.7 million rise in May, but remain well below prior peaks. As has been the case over the last few months, there were a number of technical issues with the June report including unusually low response rates and improper coding of some classifications (though improper coding is becoming less significant). Nevertheless, the report suggests that the labor market is recovering as restrictive government policies are lifted.

Overall, private payrolls added 4.7 million jobs in June following a gain of 3.2 million in May. Private services added 4.3 million while goods-producing industries gained 504,000. For private service-producing industries, the gains were led by a 2.1 million increase in leisure and hospitality followed by retail which added 740,000, and health care and social-assistance industries with a 475,000 increase. Within the 504,000 gain in good-producing industries, construction added 158,000 jobs, durable-goods manufacturing increased by 290,000, and nondurable-goods manufacturing rose by 66,000. Mining and logging industries lost 10,000 jobs.

The total number of officially unemployed fell to 17.8 million in June, a drop of 3.2 million from May. The number of officially unemployed in February was just 5.8 million. The latest tally puts the unemployment rate at 11.1 percent, down from 13.3 percent in May while the participation rate ticked up to 61.5 percent from 60.8 percent. Despite the improvement, the 11.1 percent rate is still higher than the two next highest cycle peaks, the 10.7 percent peak in November 1982 and the 10.0 percent peak in 2009. Though data collection was much less reliable, the unemployment rate following the Great Depression was estimated to have peaked at about 25 percent in 1933. The Bureau of Labor Statistics also noted that the technical issues with this report likely underestimated the unemployment rate by about 1 percentage point in June, meaning the actual rate was closer to 12 percent. The officially reported underemployed and unemployed rate, referred to as the U-6 rate, fell from 21.2 percent in May to 18.0 in June.

Total personal income drops but wages rise

Personal income fell 4.2 percent in May, according to data from the Bureau of Economic Analysis. The drop in personal income consisted, in part, of a 2.7 percent increase in wages and salaries. Wages and salaries, which typically account for about half of personal income, rose as some employees went back to work after lockdown policies were eased. Supplements to wages and salaries (primarily employer contributions to pension and insurance funds and government social-insurance programs) which typically account for another 12 percent of personal income also posted a gain, rising 1.2 percent in May.

Proprietors’ income jumped 2.8 percent for the month following a 12.7 percent plunge in April while income on assets (interest and dividends) dropped 1.4 percent in the latest month.

Personal transfer payments, which includes stimulus payments, fell 17.2 percent in May after a massive 90.1 percent gain in April. Personal tax payments rose 1.8 percent, leaving disposable income with a drop of 4.9 percent. Adjusting for price changes, real disposable income fell 5.0 percent in May, down from a 13.6 percent rise in April.

Personal savings rate remains elevated

The personal savings rate held at an extremely elevated level in May, coming in at 23.2 percent of disposable income following rates of 32.2 percent in April, and 12.6 percent in March, according to the Bureau of Economic Analysis. A more comprehensive measure of savings is available in the quarterly flow-of-funds data from the Federal Reserve. That measure has typically shown a higher savings rate compared to the measure in the monthly personal-income release. For the first quarter, the savings rate using flow of funds methodology and data was 20.8 percent versus 9.6 percent using Bureau of Economic Analysis methodology and data. Second-quarter flow of funds data are scheduled to be released on September 21.

Consumer Sentiment recovers but reflects lingering doubts and regional disparities

The Consumer Confidence Index from The Conference Board recovered somewhat in June, rising 12.2 points to 98.1 but is still 21.1 percent below the year-ago level. The index is constructed so that it equals 100 in 1985. Both components rose in June.

The present-situation component increased to 86.2 from 68.4, a 17.8-point gain though the June result is 47.5 percent below June 2019. According to The Conference Board report, “Consumer Confidence partially rebounded in June but remains well below pre-pandemic levels. The reopening of the economy and relative improvement in unemployment claims helped improve consumers’ assessment of current conditions, but the Present Situation Index suggests that economic conditions remain weak.”

The expectations component added 8.4 points to 106.0 from 97.6 in the prior month. The Conference Board report also noted, “Looking ahead, consumers are less pessimistic about the short-term outlook, but do not foresee a significant pickup in economic activity. Faced with an uncertain and uneven path to recovery, and a potential COVID-19 resurgence, it’s too soon to say that consumers have turned the corner and are ready to begin spending at pre-pandemic levels.”

The Conference Board results are mostly in line with the final results from the University of Michigan. The final June results from the University of Michigan Surveys of Consumers show overall consumer sentiment rose again following a sharp gain in May. The May rise followed the largest single-month decline on record in April. While the two consecutive gains are consistent with other signs that the unprecedented plunge in economic activity may be starting to reverse, the survey notes that there were wide disparities regionally, likely caused by new outbreaks of COVID-19 in some states.

Consumer sentiment increased to 78.1 in June, up from 72.3 in May, an 8.0 percent rise. From a year ago, the index is still down 20.5 percent. Both sub-indexes posted gains in June. The current-economic-conditions index rose to 87.1 from 82.3 in May. That is a 5.8 percent gain but still leaves the index with a 22.2 percent decrease from June 2019. The second sub-index — that of consumer expectations, one of the AIER leading indicators — rose 6.4 points or 9.7 percent for the month but is 19.0 percent below the prior year.

According to the University of Michigan report, “Consumer sentiment slipped in the last half of June, although it still recorded its second monthly gain over the April low. While most consumers believe that economic conditions could hardly worsen from the recent shutdown of the national economy, prospective growth in the economy is more closely tied to progress against the coronavirus.” 

The link between the virus and the economy is becoming apparent in regional sentiment. The report further states, “The early reopening of the economy has undoubtedly restored jobs and incomes, but it has come at the probable cost of an uptick in the spread of the virus. The Sentiment Index rose by just 0.5 Index-points among Southern residents in June, and by only 3.3 Index-points among Western residents. In contrast, the Sentiment Index among residents of the Northeast rose by an all-time record of 19.1 Index-points in June, with residents apparently expecting the later and more gradual reopening to produce at worst a negligible increase in infections.”

The report goes on, “The resurgence of the virus will be accompanied by weaker consumer demand among residents of the Southern and Western regions and may even temper the reactions of consumers in the Northeast. As a result, the need for additional fiscal policies to relieve financial hardships has risen. Unfortunately, confidence in government economic policies has fallen in the June survey to its lowest level since Trump entered office.”

Auto sales remain well below recent range in June

Sales of light vehicles totaled 13.0 million at an annual rate in June, continuing a partial rebound from the 8.7 million pace in April and 12.3 million rate in May. The pace of sales in April was the lowest on record since this data series began in 1976 and follows a run of 72 months in the 16 to 18 million range from March 2014 through February 2020.

For the month of June, light-truck sales totaled 10.1 million at an annual rate, a slight increase from the 9.6 million rate in May but well ahead of the 6.7 million rate in April. Car sales also had a modest gain, rising to a 3.0 annual rate versus 2.7 in May and 2.0 in April. On a percentage basis, light-trucks posted a 4.8 percent gain in June while cars had an 8.9 percent rise.

Consumer spending bounced back in May following a disastrous April

Retail sales and food-services spending posted a record gain in May, rising 17.7 percent from the prior month following a 14.7 percent drop in April and an 8.2 percent decline in March. Excluding the volatile motor vehicle and gas categories, core retail sales and food services were up 12.4 percent in May after a fall of 14.4 percent in April. Over the past year, total retail sales and food services were still down 6.1 percent in May while core retail sales and food services are 3.9 percent below year ago levels. The May gains still leave total retail sales 7.3 percent below the eight-year trend while core retail sales are 6.3 percent below trend.

Gains were broad-based across industries led by a 188.0 percent surge for clothing and accessory stores, followed by an 89.7 percent rise in furniture and home furnishings, an 88.2 percent jump in sporting-goods, hobby, musical-instrument, and bookstores, a 50.5 percent leap for electronics and appliance stores, a 44.1 percent increase for motor vehicle and motor vehicle–parts dealers, and a 29.1 percent gain for food services.

Nonstore retail sales rose 9.0 percent for the month and along with building materials, gardening equipment and supplies dealers, food stores, and sporting goods, are the only major categories to show a gain from a year ago, rising 30.8 percent, 16.4 percent, 14.5 percent, and 4.9 percent, respectively.

Total personal consumption expenditures (PCE), a broader measure of consumer spending than retail sales, rose a record 8.2 percent in May following a 12.6 percent decrease in April. Among the components, durable goods rose 28.6 percent while nondurable-goods spending gained 7.7 percent and spending on services increased 5.4 percent for the month. After adjusting for price changes, real PCE increased 8.1 percent with a 28.4 percent gain in real durable-goods spending, a 7.9 percent gain in real nondurable-goods spending and a 5.2 percent rise in real services spending. Despite the gains in May, spending is still down from a year ago in nominal terms with total expenditures off 9.3 percent, durable-goods spending down 0.3 percent, nondurable goods down 2.4 percent, and services showing a 12.7 percent drop.

Manufacturing-sector outlook improving

The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index showed dramatic improvement, registering a 52.6 percent reading in June, up from 43.1 percent in May and the first reading above the neutral 50 threshold since February. The June result follows three months in a row in the 40s. Overall, the report notes, “June signifies manufacturing entering an expected expansion cycle after the disruption caused by the coronavirus (COVID-19) pandemic. Comments from the panel were positive (1.3 positive comments for every one cautious comment), reversing the cautious trend which began in March.”

The composite Purchasing Managers’ Index gain of 9.5 percentage points was a month-over-month rate of change not seen since 1980 while several of the key components of the Purchasing Managers’ Index posted “gains not seen in modern times.” The New Orders Index came in at 56.4 percent, up from 31.8 percent in May, a jump of 24.1 percentage points and the first reading above 50 since January. The New Export Orders Index came in at 47.6 percent in June, up 8.1 percentage points from a 39.5 percent result in May. The Backlog-of-Orders Index came in at 45.3 percent in June, up from 38.2 percent in May and suggesting a fourth consecutive month of decline in backlogs. The backlogs index has been below 50 for 13 of the past 14 months.

The Production Index was at 57.3 percent in June, up from 33.2 percent in May and a record-low 27.5 in April. Thirteen industries reported growth in the latest month while three reported contraction.

The Supplier Deliveries Index, a measure of delivery times from suppliers to manufacturers, eased back, falling to 56.9 percent from 68.0 percent in May. Slower supplier deliveries are usually consistent with stronger manufacturing activity. However, the slower deliveries in recent months have been more a result of supply chain and logistical constraints. According to the report, “Suppliers continue to struggle to deliver, although at a slower rate compared to May. Plant shutdowns, transportation challenges and continuing difficulties in importing parts and components continue to be factors, but to lesser degrees. The Supplier Delivery Index currently reflects a healthy supply/demand balance.”

Commerce Department data on new orders for durable goods staged a partial rebound in May, rising 15.4 percent following declines of 18.1 percent in April and 16.7 percent in March. If transportation equipment is excluded, new orders for durable goods increased 4.0 percent in May following an 8.2 percent fall in April and a 1.8 percent decline in March. Durable-goods orders had been holding above the $200 billion level since April 2011 before posting sharp declines in March and April. New orders for May totaled $194.4 billion, about 3 percent shy of the $200 billion level.

New orders for nondefense capital goods excluding aircraft, a proxy for business equipment investment, rose 2.3 percent in May following drops of 6.5 percent in April and 1.3 percent in March. This key category had been trending flat since mid-2018, hovering in the $65 to $70 billion range. The $61.3 billion pace for April was the slowest since August 2017 but the May gain puts the level back up to $62.7 billion.

 The major categories of durable goods shown in the report all posted gains in the latest month. Among the individual categories, primary metals rose 9.1 percent, fabricated metal products gained 7.4 percent, machinery orders were up 1.1 percent, computers and electronic products increased 0.7 percent, electrical equipment and appliances added 3.9 percent, transportation equipment orders surged 80.7 percent, and the catch-all “other durables” category was up 3.8 percent.

Within the transportation category, motor vehicles were up 27.5 percent while defense aircraft orders increased 6.0 percent. Nondefense aircraft orders totaled $3.07 billion following two months of net negative orders. Net negative new orders represent cancellation of previously placed orders totaling more than total new orders for the period.

The Federal Reserve’s industrial production index rose 1.4 percent in May following a record monthly decline of 12.5 percent in April. The May gain is the largest rise since October 2017. Over the past year, industrial production is down 15.3 percent. Total capacity utilization increased 0.8 percentage points to 64.8 percent.

Manufacturing output, which accounts for about 75 percent of total industrial production, rose 3.8 percent after sinking 15.5 in April. May had the largest monthly gains since December 1959 but that still leaves manufacturing output 16.5 percent below year-ago levels. Manufacturing utilization rose 2.2 percentage points to 62.2 percent.

Mining output posted a 6.8 percent decline for the month, the fourth decline in a row, while utilities output dropped 2.3 percent in May. Over the past year, mining output is down 14.1 percent while utilities output is down 8.0 percent. Materials production (about 46 percent of industrial activity) continued to show weakness as output decreased 0.8 percent for the month and is down 14.0 percent from a year ago.

Services-sector survey suggests expansion

The Institute for Supply Management’s nonmanufacturing index posted a record 11.7 percentage-point increase in June, rising to a reading of 57.1 from 45.4 in the prior month. The June result follows two consecutive months below the neutral 50 threshold including a record monthly decline in April. The results suggest expansion for the services sector and the broader economy.

Among the key components of the nonmanufacturing index, the business-activity index (comparable to the production index in the ISM manufacturing report) surged to 66.0 in June, up from 41.0 in May and 26.0 in April (the lowest reading since the survey began in 1997, see top chart). The June result is the highest since January 2004. For June, 15 industries in the nonmanufacturing survey reported expansion versus 1 reporting contraction.

The nonmanufacturing new-orders index rose to 61.6 from 41.9 in May and 32.9 in April. Fifteen industries reported expansion in new orders in June while just one reported contraction. The new-export-orders index, a separate index that measures only orders for export, was 58.9 in June, versus 51.4 in May and 36.3 in April (the lowest since November 2008.) Seven industries reported growth in export orders, equaling the seven industries reporting declines.

The nonmanufacturing employment index came in at 43.1 in June, up from 31.8 in May and 30.0 in April. Employment remains one of the weaker areas of the economy despite the large gain in jobs reported in the June jobs report.

Supplier deliveries, a measure of delivery times for suppliers to nonmanufacturers, came in at 57.5, down from 67.0 in the prior month and 78.3 in April. It suggests suppliers are falling further behind in delivering supplies to nonmanufacturers, though the slippage has decelerated from the prior two months. Typically, slower deliveries are consistent with a strong economy but in this environment, the slower deliveries are a result of production constraints and transportation difficulties, not strong economic conditions.

Housing activity uneven across regions

Housing activity improved modestly in May as starts and permits posted gains. However, the results were uneven across the major regions. Nevertheless, low mortgage rates and easing lockdown restrictions are giving a boost to homebuilder confidence.

Total housing starts rose to a 974,000 annual rate from a 934,000 pace in April, a 4.3 percent increase. The dominant single-family segment, which accounts for about two-thirds of new home construction, rose 0.1 percent for the month to a rate of 675,000. Starts of multifamily structures with five or more units increased by 16.9 percent to 291,000. From a year ago, total starts are down 23.2 percent with single-family starts off 17.8 percent and multifamily starts down 33.1 percent.

Among the four regions in the report, total starts fell in two, the South (−16.0 percent) and the Midwest (−1.5 percent), while the Northeast gained 12.8 percent and the West surged 69.8 percent. For the single-family segment, starts fell in the South (−6.9 percent) and the Midwest (−16.0 percent), while the Northeast increased 63.6 percent and the West jumped 21.5 percent.

For housing permits, total permits rose 14.4 percent to 1.220 million from 1.066 million in April. Total permits are 8.8 percent below the May 2019 level. Single-family permits were up 11.9 percent at 745,000 in May while permits for two- to four-family units gained 24.2 percent and permits for five or more units increased 18.3 percent to 434,000. Combined, multifamily permits were issued at a 475,000 pace versus 400,000 in April. Permits for single-family structures are down 9.9 percent from a year ago while permits for two- to four-family structures are up 10.8 percent and permits for structures with five or more units are down 8.4 percent over the past year.

Permits rose across all four regions in the report, with the South, the largest region by volume, up 7.7 percent, the West posting a 12.3 percent rise, the Midwest gaining 18.4 percent and the Northeast surging 82.0 percent. From a year ago, the South is up 14.3 percent, the West is 16.7 percent higher, the Midwest gained 20.3 percent and the Northeast surged 34.6 percent.

Mortgage rates remain near all-time lows and should provide some support as lockdown restrictions ease. That potential likely helped boost the Housing Market Index, a measure of builder confidence from the National Association of Home Builders. The composite Housing Market Index posted a second monthly gain in June, rising to 58 from 37 in May and 30 in April. In February, before the worst of the pandemic and implementation of lockdown restrictions, the index was at 72, and above 70 for the sixth consecutive month. The index rose in all four regions in June. Like many parts of the economy, housing is rebounding from severe declines following the implementation of lockdown restrictions in response to the rapid spread of COVID-19. Housing is one of the areas that may face structural changes if buyers and renters develop permanent changes to their housing preferences. If it is believed that higher density living represents a higher risk in future pandemics, then there may be some added demand for less dense suburban and rural housing. This trend could be boosted if businesses implement permanent work from home policies, to make employees happy but also to cut down on high-cost commercial real estate, especially in high density, high cost cities.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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