Coronavirus chaos moving from markets to economy

  • The past couple of weeks have been dominated by the financial market impact of the coronavirus pandemic, with equity markets continuing to plummet, the dollar surging and signs of strain persisting in money markets, despite the Fed’s interventions. The next couple of weeks will provide clearer evidence of the economic impact. We already know from high-frequency data that traffic congestion, hotel occupancy and restaurant dining are down sharply from normal levels, but the potentially bigger news is that coronavirus containment measures are starting to have a dramatic impact on the labour market. Reports suggest that jobless claims in a number of states have already skyrocketed as workers in the retail, leisure and transport sectors have been laid off. (See Chart 1.) Assuming a similar pattern nationwide, we could be looking at an unprecedented jump in initial jobless claims from current levels of just over 200,000 to well over one million within the next few weeks. In that environment, the clock is rapidly ticking for Congress to provide substantial fiscal support.
  • Output and activity indicators point to a sharp nationwide slowdown in activity.
  • Consumer spending indicators suggest discretionary spending has plunged.
  • Investment indicators imply that mining investment will halve in the coming months.
  • External trade indicators suggest imports are now contracting sharply.
  • Labour market indicators point to a surge in jobless claims over the past week.
  • Inflation indicators suggest inflation will fall back sharply in the coming months.
  • Financial market indicators reveal the Fed’s actions have done little to calm markets.

Chart 1: Selected Initial Jobless Claims by State (000s)

Sources: Refinitiv, Various media reports

Output & Activity

  • Widespread school closures and lockdowns of large parts of the population, in response to the explosion in COVID-19 cases (2), will deliver an enormous hit to economic activity beginning in the second half of March. If cases continue rising exponentially as in Europe, we could see shutdowns extended nationwide for the entire quarter. Even an absolute best-case, including a Korea-style flattening of the curve by the end of the month, would be equivalent to the number of US cases topping out at close to 50,000 (3).
  • The Empire State manufacturing survey, which covers mostly the first week of March, showed business conditions falling to recessionary levels (4). However, the underlying components, including measures of new orders and employment, held up better (5).
  • Conditions will have deteriorated sharply since then. Google searches for “coronavirus” surged in the middle of the month (6). Compared to the situation last week, congestion is now down sharply in every major US city, suggesting economic activity is running well below normal nationwide (7).

Chart 2: US Confirmed Cases & Deaths from COVID-19

Chart 3: Confirmed COVID-19 Cases (per Million)

Chart 4: Empire State Headline Index & Real GDP

Chart 5: ISM-Style Empire State & ISM Mfg.

Chart 6: Google Searches for “coronavirus” (Max = 100)

Chart 7: AM Rush-Hour Congestion (% Chg from 2019)

Sources: Refinitiv, John Hopkins CSEE, TomTom, Google Trends, CE

Consumer Spending

  • Ahead of the coronavirus epidemic, underlying control group retail sales had begun to rebound, suggesting consumption was on course for growth of 1.5-2.0% annualised in the first quarter, similar to the 1.7% gain in the fourth quarter (8). The weekly Redbook chain store sales figures do not have a great relationship with the official data, but point to a small panic-buying related bump in sales in the first half of March (9).
  • Wide swathes of discretionary spending have dried up since then. Hotel occupancy rates were down in the first week of March, but anecdotal reports suggest rates are in some cases down to single digits (10). In-person restaurant visits have virtually stopped across the country in recent days, even in cities where establishments have not yet been forced to close (11).
  • The hit to consumer confidence in the first half of March was limited (12). Although lower gas prices will help consumers, the big hit to equity markets already points to a sharp drop in confidence (13). As labour market conditions deteriorate and virus fears mount, that hit is likely to intensify further.

Chart 8: Retail Sales Ex Autos, Food, Gas & Bldg Mat.

Chart 9: Redbook Weekly Sales & Ctrl Grp Retail (%y/y)

Chart 10: Hotel Occupancy Rates (%)

Chart 11: Daily Nationwide Restaurant Visits (% y/y)

Chart 12: B’berg Weekly Consumer Confidence Index

Chart 13: U. Mich Confidence & S&P 500 (% y/y)

Sources: Refinitiv, Bloomberg, STR, OpenTable, Capital Economics


  • Even heading into the crisis, business structures and equipment investment had been falling outright and, as in 2008/09, they are likely to be the hardest hit components in the months ahead (14). The February industrial production figures showed that business equipment production is contracting again, though that so far mostly reflects the disruption at Boeing (15).
  • The coming fall in domestic demand will hit investment hard, while the surge in borrowing costs, especially for junk-rated borrowers, will prove an additional constraint (16). The collapse in global oil prices will soon lead to a sharp contraction in oil drilling activity (17). Mining investment is a much smaller share of the economy than a few years ago, but could still contract by close to $50bn annualised over the next quarter or two (18).
  • Residential investment has been a bright spot and the weather-related surge in housing starts at the beginning of the year means it will provide a big boost to GDP growth in the first quarter. The early signs for March have not shown much of a hit to homebuilder sentiment yet, but we suspect that will begin to change in April (19).

Chart 14: Business Investment (% y/y)

Chart 15: Biz Equip Prod. & Cap. Gds. (% 3m/3m Ann.)

Chart 16: Corp. Bond Yield & Biz Equip. Investment

Chart 17: WTI Oil Price & Active Drilling Rigs

Chart 18: WTI Oil Price & Real Mining Investment

Chart 19: Housing Starts & Homebuilder Confidence

Sources: Refinitiv, CE

External Trade

  • After falling in January, both exports and imports look set to plunge in the months ahead, as domestic and global demand contract sharply (20). Reflecting the virus-related disruption in China’s factory sector, LA port data show a 20% fall in inbound containers on a seasonally-adjusted basis in February, consistent with a near-3% m/m decline in real goods imports (21).
  • The February ISM imports index, which came too early to pick up any deterioration in domestic demand, points to a sharper fall in imports (22). With exports to China accounting for less than 1% of GDP, there are few signs yet of a similarly large decline in export orders, though with the virus spreading globally that is likely to be only a matter of time (23).
  • The US is also exposed through its trade surplus in travel services, with widespread border closures and forced quarantines slamming the brakes on $200bn of tourism exports, equivalent to 8% of total exports (24). The sharp appreciation of the dollar in recent days, if sustained, will be an additional headwind (25).

Chart 20: Real Exports & Imports ($bn)

Chart 21: LA Inbound Containers & Imports (% m/m)

Chart 22: Real Imports & ISM Imports Index

Chart 23: Real Exports & ISM Exports Index

Chart 24: US Real Travel Exports & Imports ($bn Ann.)

Chart 25: Trade Weighted Dollar & Goods Exports

Sources: Refinitiv, BEA, Capital Economics

Labour Market

  • The surge in non-farm payrolls in January and February illustrates that the jobs market was running red-hot before the virus struck (26), but the latest indicators point to a potentially dramatic deterioration in labour market conditions over the past couple of weeks.
  • It’s true that the early survey evidence for early March was hardly a disaster, with the New York Fed’s employment indices little changed (27). There was also no sign of trouble in the initial jobless claims data for the start of the month (28). Unfortunately, the latter appears to have been the calm before the storm, with the recent spike in Google searches for unemployment pointing, at face value at least, to a potentially unprecedented surge in jobless claims over the next couple of weeks (29).
  • The Google trends data don’t appear to be an outlier, with media reports suggesting that a number of states have seen a huge rise in claims over the past week (30). Job losses will be concentrated in the leisure, retail and transport sectors, which account for about 25% of non-farm employment (31). At this rate, however, it may not be long before other sectors also start shedding workers.

Chart 26: Change in Non-Farm Payrolls (000s)

Chart 27: New York Fed Employment Survey Indices

Chart 28: Initial Jobless Claims (000s)

Chart 29: Google Searches & Initial Jobless Claims

Chart 30: Selected Initial Jobless Claims by State (000s)

Chart 31: Employment by Industry (% of Total)

Sources: Refinitiv, Google Trends, Various media reports


  • The coronavirus crisis will push headline CPI inflation down to near-zero, from 2.3% in February (32). The big drop in global oil prices will quickly feed through to a collapse in gasoline prices (33).
  • That effect alone could reduce headline CPI inflation by 2 percentage points, a similar hit to that seen in 2014-15 (34). The crisis will also hit core inflation, with both core services and core goods inflation likely to drop back (35).
  • Deflation in core prices is unlikely in part thanks to the flat Phillips curve. The huge output gap that opened in 2008 delivered a big hit to core inflation, but it remained positive (36). The earliest hit to services inflation will show up in airfares, with load factors likely to have fallen off a cliff in recent weeks (37).

Chart 32: CPI Inflation (%)

Chart 33: Gasoline Prices ($ per gallon)

Chart 34: Gasoline Prices & Contrib. to Headline CPI

Chart 35: Core CPI Goods & Services (%y/y)

Chart 36: Change in Output Gap & Core CPI

Chart 37: Airfares & Airline Load Factor

Sources: Refinitiv, Capital Economics, CBO

Inflation (Continued)

  • Shelter inflation will also be weighed down by a fall in lodging away from home prices, as the fall in hotel occupancy rates eliminates hotels’ pricing power (38). Some goods prices may rise as a result of supply disruption, but we suspect the overall trend in goods inflation will also be down. The latest wholesale data suggest that used vehicle prices are stabilising but, with few consumers visiting dealerships, that won’t last long (39).
  • More broadly, the sharp appreciation of the dollar will keep import prices falling (40). All that suggests that core inflation will decline over the coming year or so. At 1.5%, core PCE inflation is already running well below the Fed’s 2.0% target and will fall further (41).
  • Market-based measures of inflation compensation have plunged close to their financial crisis-lows in recent days, in part reflecting the slump in global oil prices (42). Survey measures of households’ inflation expectations are unlikely to fall sharply, but are already running below levels of even a few years ago (43).

Chart 38: Hotel Room Rates (% y/y)

Chart 39: Used Vehicle Prices (% y/y)

Chart 40: Broad Dollar TWI & Import Prices (%y/y)

Chart 41: Core CPI & PCE Inflation (%)

Chart 42: Inflation Compensation (%)

Chart 43: Households’ Inflation Expectations (%)

Sources: Refinitiv, Bloomberg, Black Book

Financial Markets

  • The Fed’s action to slash interest rates to near-zero and commit to keeping them there has pulled Treasury yields down sharply, though forced selling and a rush to cash has caused the yield curve to steepen a bit in recent days (44). The Fed has offered huge amounts of repos and expanded its discount window, as well as purchasing more than $40bn of Treasury securities per day to try and restore liquidity. Nevertheless, interbank spreads remain well above usual levels (45).
  • There are broader signs of market stress too, with corporate bond yields rising sharply despite the drop back in Treasury yields (46). In part that reflects specific concerns about the impact of very low oil prices on the energy sector (47).
  • The S&P 500 has now fallen by over 30% from its peak (48). In the initial weeks of the outbreak, the dollar was held back by falling interest rate expectations, but in recent days safe-haven demand has dominated, pushing the trade-weighted dollar up to a record high in nominal terms (49). In real terms, the dollar is now almost as strong as it was in the early 2000s, though still well below its 1985 peak.

Chart 44: Treasury Yields (%)

Chart 45: Credit Spreads (bp)

Chart 46: Corporate Bond Yields (%)

Chart 47: 5-Year CDS (bp)

Chart 48: S&P 500

Chart 49: Trade Weighted Dollar Index

Source: Refinitiv

Paul Ashworth, Chief US Economist,
Andrew Hunter, Senior US Economist,
Michael Pearce, Senior US Economist, +1 646 583 3163,

Paul Ashworth Chief North America Economist
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