– April 13, 2020
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U.S. Likely Entered A New Recession in March, Ending the Record-long Expansion.

AIER’s Business Cycle Conditions Leading Indicators index held steady at 54 in March. March is the 11th consecutive month within the 46 to 54 range for the Leading Indicators Index. The Roughly Coincident Indicators index fell 17 points to 58 while the Lagging Indicators index gained 8 points to reach 50 (see chart). Despite the continued modestly positive reading for the Leading Indicator index, the U.S. economy likely contracted in March, ending the longest U.S. economic expansion on record.

The March decline for the U.S. economy was a result of the outbreak of COVID-19 and subsequent Federal and state policy responses. Government mandates to close nonessential businesses and require people to shelter-in-place in order to contain the spread of COVID-19 has resulted in a collapse in economic activity including unprecedented job losses, plunging sales in many industries, and a sharply rising risk of defaults across the economy.

In response to the plunge in activity, the Federal government has enacted multi-trillion-dollar efforts to support consumers and businesses while the Federal Reserve has driven interest rates down close to zero and resumed and expanded bond-buying programs from the Great Recession. The unprecedented nature of the current economic conditions and policy responses makes gauging the future progression of the economy even more difficult. Close monitoring of economic data, financial market performance, and policy responses remain critical.

Leading indicators index unchanged in March

The AIER Leading Indicators index was 54 in March, unchanged from the prior month. The latest result was the 11th consecutive reading in the 46 to 54 range and the fifth reading of 54 in the last seven months. Over that period, the index has averaged 53. Overall, 5 of the 12 leading indicators maintained a positive trend in March, with 4 trending lower and 3 indicators were neutral. The overall tallies were the same as the prior month though five of the 12 indicators had offsetting changes in direction for the month.

The ratio of manufacturing and trade sales to inventory and average workweek in manufacturing improved in March, with the former moving from a negative trend to a positive trend while the latter moved from a negative trend to a neutral trend. Real retail sales and food services, real new orders for core capital goods, and the University of Michigan index of consumer expectations all weakened in the latest month with real retail sales and food services and the University of Michigan index of consumer expectations moving from positive trends to neutral trends while real new orders for core capital goods moved from a neutral trend to a negative trend.

Overall, the Leading Indicators index remained slightly above the neutral 50 threshold. Historically, that would suggest continued expansion is likely. However, the highly unusual and extreme distortions to economic activity over the past several weeks make continued expansion nearly impossible. Furthermore, government mandates for shuttering of nonessential businesses and sheltering-in-place for workers and consumers are an unprecedented source for economic disruption and recession, at least in modern U.S. economic history. The unusual sources of disruption combined with time lags in the collection and dissemination of many economic statistics (including many of AIER’s business cycle indicators) impose a degree of immediate obsolescence on traditional models. As a result, despite the slightly positive reading for the leading indicators index, the mounting evidence suggests the U.S. economy likely peaked in February and entered recession in March. 

The roughly coincident indicators fell to 58 in March, down 17 points from 75 in February. Just one indicator changed direction in March. The employment-to-population ratio fell to a negative trend from a positive trend in the prior month. Overall, three indicators were still trending higher, two were trending lower and one was neutral versus four trending higher, one trending lower and one neutral in February.

AIER’s Lagging Indicators index improved somewhat in the latest month, returning to a reading of 50 in March from 42 in February. Three indicators changed direction in March with core consumer prices moving to a positive trend and real private nonresidential construction moving up to a neutral trend from a negative trend. Partially offsetting those improvements was a decline in real manufacturing and trade inventories changing from a positive trend to a neutral trend.

Among the six lagging indicators, two indicators are trending higher, two are trending lower, and two are neutral. That compares to two trending higher, three trending lower, and one trending neutral in February.

COVID-19 Crushes job creation

U.S. nonfarm payrolls lost 701,000 jobs in March, by far the largest loss since the Great Recession. Private payrolls lost 713,000 in March. The losses in the private sector were broad-based with goods-producing industries losing 54,000, private services losing 659,000 and government adding 12,000. Within the 54,000 loss, construction was down 29,000 jobs, nondurable-goods manufacturing fell by 11,000, while durable-goods manufacturing and mining and logging industries both lost 7,000 jobs.

For private service-producing industries, which typically account for the majority of job creation, payrolls declined by 659,000, led by a 459,000 decrease in leisure and hospitality. Health care and social-assistance industries fell by 61,200, professional and business services declined by 52,000 with temporary help accounting for 49,500 of that total. Retail lost 46,200 workers while “other” services decreased by 24,000.

The unemployment rate jumped to 4.4 percent and the participation rate declined to 62.7 percent. Both reverse positive results over the last several years. Average hourly earnings rose 0.4 percent in March, resulting in a 12-month gain of 3.1 percent. The average length of the workweek decreased by 0.2 hours to 34.2 hours in March.

Combining payrolls with hourly earnings and hours worked, the index of aggregate weekly payrolls fell 0.7 percent in March and is up 3.3 percent from a year ago, the slowest pace of rise since 2010.

Initial claims surge to unprecedented levels

Initial claims for unemployment insurance totaled 10 million in the last two weeks of March (and are not completely captured in the March employment report) suggesting additional steep losses in coming months. Initial claims for unemployment insurance soared to 6.65 million for the week ending March 28, doubling last week’s shocking 3.3 million, and dwarfing the previous high of 695,000 in October 1982. During the Great Recession in 2008-09, total job losses were 8.8 million over 25 months versus a 2-week total of 9.96 million initial claims in just two weeks.

According to the Employment and Training Administration within the Department of Labor, “The COVID-19 virus continues to impact the number of initial claims. Nearly every state providing comments cited the COVID-19 virus. States continued to identify increases related to the services industries broadly, again led by accommodation and food services. However, state comments indicated a wider impact across industries. Many states continued to cite the health care and social assistance, and manufacturing industries, while an increasing number of states identified the retail and wholesale trade and construction industries.”

Unit auto sales plunged to lowest level in almost a decade

Sales of light vehicles totaled 11.4 million at an annual rate in March, down sharply from a 16.7 million pace in February. The pace of sales in March is the lowest since April 2010 and ends a run of 72 months in the 16 to 18 million range. Unit vehicle sales fell significantly below the range as the 2008–9 recession began, hitting a low of just 9.0 million in February 2009. Sales began a slow recovery and returned to the 16 to 18 million range in March 2014.

As of March 2020, light-truck sales totaled 8.5 million at an annual rate, the lowest since February 2014, while cars managed just 2.9 million, the lowest on record going back to 1967. That puts the light-truck share at 74.8 percent, completely dominating the car share of 25.2 percent. The rising share of light-trucks continues a trend in place since 2013. In February 2013, the split between cars and light-trucks (SUVs and pick-up trucks) was about even, with both segments selling about 7.76 million at an annual rate.

Capital markets react harshly

Capital markets began to react to the outbreak of COVID-19 in February. The Standard and Poor’s 500 index peaked at 3,386 on February 19. Over the next 23 trading days, the index fell 1,149 points or 33.9 percent to 2,237.  Since the March low, the index has recovered a bit but remains about 25 percent below the February peak.

However, not all of the decline can be attributed to the outbreak. During that time, political tensions rose between Saudi Arabia and Russia over oil production. The feuding between the two helped push crude oil prices down as low as $16.60 per barrel from over $63 per barrel in January.  Like the equity market, oil prices have recovered a bit but remain sharply lower. That plunge in oil prices created a double whammy for the energy sector.  The collapse of demand due to plunging economic activity while political tensions elevated expectations for supply. The Standard and Poor’s 500 Energy sector index fell from a peak of 462 on January 6 to a low of 180 on March 18, a drop of over 60 percent.

The extreme conditions drove the VIX index, a measure of market volatility also known as the fear gauge, from the mid-teens in mid-January to a record high 82.69 on March 16. The only other times the index had breached 80 were October 27 and November 20, 2008. 

In the U.S. Treasury market, the benchmark 10-year note yield fell to an all-time low of 0.50 percent while the yield on the 3-month Treasury bill fell below zero briefly before returning to single-digit basis-point yields.

Policy is unprecedented; long-term implications are unknown

Government policy has been unprecedented in so many ways. The restrictions on business and personal life are the most obvious. However, there are also unprecedented fiscal and monetary policy actions. Massive Federal spending, in the trillions of dollars range, will exacerbate an already-disastrous debt burden for the country and future generations. Monetary policy quickly ventured down dangerous paths of zero interest rates and massive bond-buying to help support economic activity and provide liquidity.  These aggressive policy actions are still evolving, and the range of bond-buying appears to be expanding. Long-term implications of these programs are unclear at this point but raise serious concerns about distortions in capital markets and future policy.

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Robert Hughes

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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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