By HSH Market Trends
May 8, 2020 — If you are a fan of bad economic news you are having a veritable field day at the moment. Of course, you might also be one of the optimists powering major stock indexes higher despite truly awful (if backward looking) data.
It might be said that if this is as bad as it can get, then there really is only one way to go in the future, and that’s toward improvement. However, if Murphy’s Law teaches us nothing else, it is that what is bad can always get worse. Such as it may be for the state of the economy, which continues to post historic levels of inactivity.
It’s hard to overstate the economic carnage the coronavirus shutdown has caused, and we are only in the beginning stages of recording it. A record-long string of job gains that ran for over 10 years came to an abrupt end in March, when 870,000 job losses were tallied, a figure that was revised upward from an initial 701,000 reported. Now, the labor market has hit a brick wall; 20.5 million jobs were lost in April. Twenty-point-five million. This is a one-month figure that is two and a half times as large as the total number of jobs lost in the Great Recession. In just a month.
The nation’s official rate of unemployment moved from 3.5% in February, a near 50-year low to a more pedestrian 4.4% in March to 14.7% in April, the largest one-month jump in the history of the employment series (which dates to 1948), and it is also the highest percentage rate in the series since that time. Nearly 10 million people also reported that they were out of work but not actively looking for employment, so they were not included in the unemployed calculation. In fact, so many folks dropped out of the labor pool that the labor force participation rate fell to 60.2%, the lowest figure since 1973.
Also worth noting is that the survey data on which the establishment data (hires/losses) and household surveys (unemployment/participation rate) is taken mid-month, and millions more have filed for unemployment benefits in the last few weeks. Even with some limited (or even broader) openings of shuttered businesses happening around the country, the May employment report will probably look little better than April.
New claims for unemployment benefits are thankfully trending lower, but only to what are still truly horrible levels. In the week ending May 2, another 3.169 million first-time applications for assistance were filed in state offices around the country, bringing the cumulative seven week total to an unthinkable 33.483 million who have requested benefits. Though the initial figure will continue to trend downward, the number of folks on on-going assistance will continue to rise; it’s already at 22.6 million, and that of course doesn’t count the new folks who applied in the most recent week, most of whom will show up in the next report.
The payroll company ADP has a report on private payrolls that precedes the monthly employment report by a couple of days. Sometimes it is highly correlated to the Bureau of Labor Statistics data and sometimes not, but this time they hit the nail on the head with a reported 20.236 million job losses for April. APD also noted it was a figure more than two times the figure they tallied for all of the Great Recession. As well, the outplacement firm of Challenger, Gray and Christmas recorded 671,129 announced layoffs for April, a record high for their tracking series which dates back “only” about 27 years.
With collapsing labor markets, it’s not surprising that worker productivity also cratered in the first quarter of 2020. The 2.5% decline in output per worker was a sharp reversal from a modest improvement in the end of last year, and the fall off in productivity means that the labor cost component of a given unit produced bounced higher, in this case by 4.8% for the period, and comes at a time when profits for companies are hard to come by and so difficult to absorb. This will probably put a damper on wage growth for a time even as we eventually accelerate out of lockdown status.
Like its twin that covers activity in the manufacturing sector, the Institute for Supply Management’s report that tracks service sector activity plummeted in April, but rather less than was feared. The 10.7-point decline in the headline figure left it standing at 41.8 for the month (consensus forecasts had placed it in the mid-30s). Still, the drop below the breakeven level of 50 broke a 122-month string of positive readings and is an 11-year low. The only component that kept the top-line figure from falling further was a spike in supplier delivery times, a situation normally associated with a broad surge in demand, but currently reflecting supply chains disrupted by COVID-19 closures and delays. Two of 18 tracked components reported increasing activity – Public Administration and Finance & Insurance, which of course makes perfect sense given the situation.
Things aren’t likely to get better for the service sector quickly. The measure of new orders for the month was 32.9, a 20-point drop, and that covering employment sported a 17-point drop to a value of 30. In the ISM series, a value of 50 is par, with value above it indicating growth and expansion and those below it contraction. The current values are consistent with an economic recession.
Although there has been a little new trade-saber rattling in the last few days, the slack economy isn’t producing much give-and-take between nations at the moment. The deficit in value the U.S. runs with its trading partners expanded a little in March, rising by $4.6 billion to $44.4 billion for the month. Unfortunately, the trend in activity here shrunk, with imports declining by $15.4 billion and exports a full $20 billion, so it’s not like economies either here or elsewhere are firing on all cylinders at the moment. Economies around the globe are opening up again at very uneven rates and amid uncertain demand, and trade will continue to be muted.
Factory orders for March shrank by 10.3%, a third consecutive monthly decline, and was pulled down by a 14.7% fall in orders for durable goods and a 5.8% fall for non-durable items. Transportation-led orders dropped off the most, what with planes largely grounded or flying mostly empty and auto sales falling sharply. However, the core measure of orders placed by business held up better overall with just a 0.1% decline for the month. Of course, this was all before the full-month hard shutdown everywhere kicked in in April, so the next overall orders report will likely be considerably worse than was March. This series dates only to 1992, but the 10.3% fall was the largest recorded.
Sales of new vehicles in April were fully half the level seen in February. On an annualized basis, AutoData reckoned that 9 million cars and light trucks were sold during the month, but at least that only represented an additional 1.8 million decline from March. The current level is noted to be the lowest since these records began in 1976, and roughly at the level seen in 2009, when the Great Recession had the auto industry beseeching Congress for support. That’s not likely to happen this time around, and prospects for improving sales are pretty good given that many manufacturers and dealers are figuring out how to at least partially function in still-closed areas and restrictions are easing elsewhere. That said, job losses and a slow improvement in the economy will make for a long road to get back to the 18 million annual units that were moved earlier this year.
Consumers will still borrow for cars and such if they can. In March, outstanding consumer credit contracted by $12.0 billion dollars, but of the two components, installment credit (auto loans, education loans, etc) managed a still-solid increase of $16.1 billion for the month. However, this was more then overwhelmed by a $28.2 billion decline in balances on revolving accounts. Odds don’t favor that consumers suddenly came up with billions to pay down accounts, but rather that normal payments took place but virtually no new borrowing happened as things began to shut down. Watch for a rebound here, though, as ordering online and contactless payments and such for everything from groceries on down will probably kick this segment higher in the months ahead.
In terms of consumer borrowing, the good news of sorts is that while banks have tightened lending conditions broadly or even significantly in some cases that this has happened at a minority of banks. For example, the latest Senior Loan Officer Opinion Survey from the Federal Reserve revealed that 38% of banks responding tightened terms and conditions for credit card accounts, up from 13.6% in the fourth quarter, while 16% of banks making auto loans tightened and 21.8% of those making consumer loans did. With employment metrics falling sharply, its not surprising that risks of lending unsecured credit are on the rise, and lending against an asset that devalues quickly such as an auto carries an additional layer of risk as well.
Lending for homes has fared much better. For residential mortgage loans that can be bought by Fannie or Freddie, 91.1% of banks in the survey said standards were unchanged; only 5.4% reported tightening and that was offset by 3.6% who said they loosened underwriting criteria. That was largely the case for government backed loans (90.7% unchanged, 1.9% tighter, 7.4% looser). Loans that met QM standards but weren’t to be sold to the GSEs saw about an 85% unchanged rate, but more that 11% or respondents did tighten, and for jumbos, the figure reported showed 81.5% of banks were about the same and the rest were tightening. Non-QM and jumbo borrowers will have the most difficult time of the bunch getting credit, but overall conditions are not that much worse than they have been, at least not yet. That’s good news for the housing market, which is having its most challenging spring homebuying season in memory.
But homes are being sold. The Mortgage Bankers Association reported that overall applications for mortgages gained by 0.1% in the week ending May 1, but surprisingly, applications for refinancing retreated for a third consecutive week (-1.7%) despite low rates. Of course, nearly 4 million homeowners are now in forbearance plans and won’t be refinancing anytime soon, and those homeowners not skipping payments but who have lost jobs and are on unemployment won’t be jumping in, either, which does take at least some of the air out of the refinancing balloon. Conversely, applications for purchase-money mortgages rose for the third week in a row, gaining 5.8% for the period. That’s the longest string of positive reading since the end of December 2019-early January 2020 and surprising, given the difficulty of the sales climate from social distancing measures.
While Murphy’s Law does say things can always get worse, it doesn’t mean that they will (although some would say that Murphy was an optimist). Certainly, we’re at least in the middle of the bad-news cycle and the odds are that there will be little encouraging news to be seen in the weeks ahead, but beyond that, the prospects may indeed be brightening. Some of that brightness comes from hope — hope that the worst of the effects of the virus are passing, hope that treatment method for those affected improve, hope for a vaccine soon and certainly cautious hope the re-opening up increasing components of the economy doesn’t result in a surge of new cases and a need to re-close… which would truly be crushing news.
After a cascade of awful data, the calendar becomes quiet for much of the week next week, and that’s not a bad thing… a sort of respite before the next bleak batch. We’ll enjoy the relative quiet. Mortgage rates were fading last Friday, prompting us to expect a decline, only to see them firm up through Thursday, confounding our expectation. They have settled back again today, but we’re not taking the bait this time, and so will expect no change in the average offered rate for a conforming 30-year FRM that Freddie Mac reports next Thursday morning.