The second-quarter GDP data released this week, which showed output plunging by a record 32.9% annualised, highlighted the unprecedented hit to the economy from the pandemic. We know that activity started to rebound from May onwards but, with the recovery already appearing to be slowing, more policy support is likely to be needed for that improvement to be sustained.
The second-quarter GDP data released this week, which showed output plunging by a record 32.9% annualised, highlighted the unprecedented hit to the economy from the pandemic. We know that activity started to rebound from May onwards but, with the recovery already appearing to be slowing, more policy support is likely to be needed for that improvement to be sustained.
This week’s Fed meeting was a slight disappointment in that regard, with the statement broadly unchanged other than the addition of a line stressing that the economic outlook is dependent on the virus. That said, officials are clearly growing concerned about the renewed wave of infections, with Chair Jerome Powell flagging up the slowdown in some of the high-frequency data on consumer spending in recent weeks. As a result, it looks increasingly likely that officials will take further steps to support the economy at the next FOMC meeting in mid-September, which may coincide with the conclusion of the Fed’s long-running review into its monetary policy framework.
Officials are gearing up to strengthen their forward guidance, potentially by committing to keep rates at near-zero until inflation has returned to the 2% target or even by announcing their intention to let inflation rise above 2%, effectively moving towards an average inflation target. That may not have much impact in the near term, but it should help to ensure that longer-term interest rates remain low, particularly if the Fed also moves to re-focus Treasury purchases towards the long end of the curve.
In the meantime, Powell again suggested that more fiscal support was likely to be needed, but the Republicans and Democrats still appear to be far apart in the negotiations over the next stimulus bill. Earlier this week the Republicans unveiled proposals for a $1trn package comprised of a second round of $1,200 stimulus cheques for individuals, a partial extension of the enhanced unemployment insurance payments and further funding for the PPP small business loans facility. But the Democrats are seeking a far larger deal and have baulked at the Republicans’ plans for unemployment insurance payments, which would cut the $600 weekly supplement to $200 until September, and then cap payments at 70% of workers’ previous wages.
Those $600 payments, which expire at midnight on Friday, are unfortunately now set for at least a temporary lapse. Nevertheless, with the personal saving rate at 19% in June and lawmakers still likely to eventually agree an overall package at least as large as the Republican bill – not least with the election less than 100 days away – this is unlikely to prove a disaster for consumer spending.
Second virus wave looks to have peaked
The one clear bit of good news this week was that the number of new coronavirus cases is now levelling off. (See Chart 1.) The virus is still spreading at a rapid pace and this will continue weighing on the economy over the coming months, as local restrictions continue and consumers remain wary of public spaces. Nevertheless, it does at least suggest that the virus can be contained without resorting to full-blown lockdowns, with the more limited restrictions on bars and other indoor venues enacted in various states in recent weeks seemingly proving successful.
Chart 1: Daily New Covid-19 Cases (000s) |
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Source: Johns Hopkins CSEE |
The week ahead
The economic data should confirm that virus concerns are weighing on the recovery, but have not yet pushed it into reverse, with non-farm payrolls rising by a smaller 1.0m and the ISM non-manufacturing index dropping back to around 54.0.
Data Previews
ISM Manufacturing Index (Jul.) 10.00 Mon. 3rd Aug.
Forecasts | Previous | Median | Capital Economics |
Headline index | 52.6 | 53.6 | 54.0 |
Production still catching up with consumption
We expect the ISM manufacturing index edged up to 54.0 in July, from 52.6, as production continued to catch up to the strong initial rebound in demand.
While the focus has been on the apparent slowdown in consumption across the economy evident across a range of high-frequency indicators, most of the timely survey evidence covering the manufacturing sector has continued to improve. An ISM-style weighted average of the sub-components of the regional Fed surveys in July is consistent with the headline ISM index rising a touch further, to 54.0, from 52.6. (See Chart 2.)
The surveys have proven to be an unusually poor guide to the magnitudes of decline in GDP and production as the hit from the pandemic deepened. But we’d interpret a rise further above 50 as another sign that the recovery in production remains intact.
Chart 2: ISM & Regional Fed Manufacturing Indices |
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Source: Refinitiv |
International Trade (Jun.) 08.30 Wed. 5th Aug.
Forecasts | Previous | Median | Capital Economics |
International trade balance | -$54.6bn | -$50.3bn | -$48.5bn |
Rebound in trade now underway
We expect the trade deficit to have narrowed in June, albeit mainly because the distortion caused by a previous surge in imports of gold unwound. Even so, the encouraging news is that both imports and exports are now rebounding strongly.
The advance goods trade report showed the deficit falling to $70.6bn, from $75.3bn, as exports surged by 13.9% and imports rose by a more modest 4.8% m/m. The former was in part due to a more than doubling in auto exports as production lines resumed, but most categories posted strong increases. The same was true for imports, though the latter was held back by a big drop in industrial supplies imports. We suspect that was driven by a drop back in gold shipments to the US, which had surged in recent months, presumably reflecting transactional demand linked to the earlier turmoil in financial markets rather than any underlying economic forces. (See Chart 3.)
Elsewhere, with travel still depressed, the rebound in both services exports and imports will be far more muted. Overall, we estimate the trade deficit fell to $48.5bn in June, from $54.6bn in May. With production still catching up with demand, exports and imports look set to rise further over the coming months, albeit at a much slower pace.
Chart 3: Imports of Non-Monetary Gold ($bn) |
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Source: Refinitiv |
ISM Non-Manufacturing Index (Jul.) 10.00 Wed. 5th Aug.
Forecasts | Previous | Median | Capital Economics |
Headline index | 57.1 | 55.0 | 54.0 |
Virus spread dampens recovery in services sector
We expect the ISM non-manufacturing index edged down to 54.0 in July, following a spectacular surge to 57.1 the month before. But that would still be consistent with a gradual expansion in the economy, rather than a sign that the recovery in the service sector has gone into reverse.
The June surge in the non-manufacturing ISM was driven largely by a rebound in the business activity sub-index to a near record high of 66, from 41. The ISM index rose far more strongly than comparable indices, such as the Markit services PMI or the regional Fed surveys. (See Chart 4.) The Markit index only edged higher in July, but an average of the regional Fed indices fell. With most of the high-frequency indicators suggesting activity still edged higher in July, we expect the ISM index to remain in expansionary territory. But reflecting the loss of momentum, we expect it fell, to 54.0 from 57.1.
Chart 4: Markit Services PMI & ISM Non-Mfg Index |
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Sources: Refinitiv, Markit |
Employment Report (Jul.) 08.30 Fri. 7th Aug.
Forecasts | Previous | Median | Capital Economics |
Change in Non-Farm Payrolls | +4,800,000 | +1,635,000 | +1,000,000 |
Unemployment Rate | 11.1% | 10.5% | 10.7% |
Average Hourly Earnings | -1.2%(+5.0%) | -0.5%(+4.2%) | -0.5%(+4.2%) |
Average Weekly Hours Worked | 34.5 | 34.4 | 34.4 |
Labour market recovery slowing
We estimate that non-farm payrolls rose by “only” 1.0 million in July. With employment currently still 15 million below its February level, that would underline that there is a long way to go in the economic recovery.
A range of indicators have suggested that the pace of economic recovery has slowed in recent weeks, apparently driven by the renewed wave of coronavirus infections across the South and West. Attracting the most concern has been the Census Bureau’s Household Pulse survey of employment which, after rising by 5.5 million between the May and June payroll survey weeks – not far from the official gain in payrolls over that time – plummeted back by nearly 7 million between the June and July reference weeks. (See Chart 5.) Nevertheless, that survey has been running for only 11 weeks and also isn’t seasonally adjusted. And while other indicators also point to a slowdown, they don’t yet suggest the recovery has gone into reverse, with the Markit employment PMIs seeing a further increase this month and continuing jobless claims trending lower.
As a result, we expect employment to have risen further in July and the unemployment rate to have fallen to 10.7%, from 11.1%. We still expect further gradual improvements over the coming months, but the recovery from here is unlikely to be as smooth.
Chart 5: CB Household Pulse Employment (Mn) |
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Source: Census Bureau |
Economic Diary & Forecasts
Date | Release/Indicator/Event | Time EST (BST-5) | Previous* | Median* | CE Forecasts* |
Mon 3rd | ISM Manufacturing Index (Jul) | 10.00 | 52.6 | 53.6 | 54.0 |
Construction Spending (Jun) | 10.00 | -2.1% | +1.0% | – | |
Tue 4th | Factory Orders (Jun) | 10.00 | +8.0% | +5.0% | +4.5% |
Wed 5th | Change in ADP Employment (Jul) | 08.15 | +2,369,000 | +1,200,000 | +800,000 |
International Trade (Jun) | 08.30 | -$54.6bn | -$50.3bn | -$48.5bn | |
ISM Non-Manufacturing Index (Jul) | 10.00 | 57.1 | 55.0 | 54.0 | |
Thu 6th | Initial Jobless Claims (w/e Aug 1st) | 08.30 | 1,434,000 | – | 1,400,000 |
Fri 7th | Change in Non-Farm Payrolls (Jul) | 08.30 | +4,800,000 | +1,635,000 | +1,000,000 |
Unemployment Rate (Jul) | 08.30 | 11.1% | 10.5% | 10.7% | |
Average Weekly Hours Worked (Jul) | 08.30 | 34.5 | 34.4 | 34.4 | |
Average Hourly Earnings (Jul) | 08.30 | -1.2%(+5.0%) | -0.5%(+4.2%) | -0.5%(+4.2%) | |
Change in Consumer Credit (Jun) | 10.00 | -$18.3bn | +$10.0bn | – | |
Selected future data releases and events | |||||
12th August | Consumer Prices (Jul) | 08.30 | – | ||
14th August | Retail Sales (Jul) | 08.30 | – | ||
Industrial Production (Jul) | 09.45 | – | |||
Uni. of Mich. Consumer Confidence (Aug, Prov.) | 10.00 | – | |||
16th September | Fed Policy Announcement | 14.00 | – | ||
*m/m(y/y) unless otherwise stated Sources: Bloomberg, Capital Economics | |||||
Main Economic & Market Forecasts | |||||||||
%q/q ann. (%y/y) unless stated | Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | 2020 | 2021 | 2022 |
GDP | -32.9 | +25.0 | +8.3 | +5.0 | +4.7 | +4.1 | (-4.6) | (+4.5) | (+4.0) |
CPI Inflation | (+0.4) | (+0.9) | (+0.8) | (+1.0) | (+2.5) | (+2.0) | (+1.1) | (+1.8) | (+1.9) |
Core CPI Inflation | (+1.3) | (+1.0) | (+0.9) | (+0.8) | (+1.7) | (+1.7) | (+1.4) | (+1.5) | (+1.8) |
Unemp. Rate (%), Period Ave. | 13.0 | 10.1 | 8.0 | 6.3 | 5.9 | 5.5 | 8.7 | 5.8 | 5.1 |
Fed Funds Rate, End Period (%) | 0.00-0.25 | 0.00-0.25 | 0.00-0.25 | 0.00-0.25 | 0.00-0.25 | 0.00-0.25 | 0.00-0.25 | 0.00-0.25 | 0.00-0.25 |
10y Treas. Yld., End Period (%) | 0.66 | 0.85 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 |
S&P 500, End Period | 3100 | 3200 | 3300 | 3300 | 3350 | 3400 | 3300 | 3500 | 3800 |
$/€, End Period | 1.12 | 1.15 | 1.20 | 1.20 | 1.20 | 1.20 | 1.20 | 1.20 | 1.20 |
¥/$, End Period | 108 | 109 | 110 | 110 | 110 | 110 | 110 | 110 | 110 |
Sources: Refinitiv, Capital Economics | |||||||||
Andrew Hunter, Senior US Economist, andrew.hunter@capitaleconomics.com