This Week In The Economy: Another Troubling Spike in US Coronavirus Cases, Worrying Labor Market Outlook, Gradual Recovery In China, Global Central Bank Roundup
Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.
No Slowdown In Sight As Coronavirus Cases Soar In The United States
The number of confirmed COVID-19 cases around the world is now over 13 million and climbing— with 13,810,534 confirmed cases. Of that number, 5,501,923 are active and there have been 590,005 deaths. The United States (sigh…) experienced another significant spike this week, and now has 3,533,905 confirmed cases — with 2,368,731 active and 138,358 fatalities.
So far this week (from July 12–July 16), there have been 316,756 new COVID-19 cases in the United States, compared to 260,536 during the same five-day period last week. On July 16 alone, there were 70, 254 new instances of coronavirus infections, as outbreaks around the country shows now signs of abating, leading many states — like California — to halt reopening plans or reimpose partial lockdowns. Oklahoma Governor Kevin Stitt also became the first U.S. governor to test positive for COVID-19.
Brazil’s struggle to contain the spread of the coronavirus continues, with the number of confirmed cases jumping to 2,014,738 at time of writing — 571,141 active and 76,822 deaths.
India is firmly ensconsed in third place, with 1,010,291 confirmed cases, 346,057 active and 25,671 fatalities. Russia has 759,293 confirmed cases, 207,707 active and 12,123 deaths.
Besides Brazil, the rest of Latin America continues is also facing a growing public health crisis. Peru has the fifth most cases globally — 341,586 confirmed, 97,977 of them are active, and 12,615 fatalities. Mexico has 324,941 cases — 83,003 confirmed and 37,574 deatlhs. Chile has 323,698 confirmed — 21,107 active, 7,290 deaths.
The United Kingdom is not out of the woods yet, either, with 292,552 confirmed cases, 247,433 active and 45,119 fatalities.
The toll the pandemic has had on the government’s coffers also became more apparent this week, as the U.S. Treasury reported a $864 billion deficit for June. This compares to a $8.5 billion deficit in June 2019. The government spent $1.1 trillion in June ($500 billion of which was by the Small Business Administration), and took in just $241 billion in revenue.
The U.S. federal deficit is already at $2.7 trillion so far in Fiscal Year 2020, compared to just $984 billion for the same period in FY2019.
Troubling U.S. Labor Market Outlook As Another Million-Plus Seek Unemployment Support
The number of first-time applicants each week for state unemployment insurance has over a million since the pandemic hit back in March, and last week was no different. The U.S. Labor Department reported that there were 1.3 million new jobless claims last week, while the number of Americans who continue to receive unemployment benefits was at 17.4 million as of the July 4 week.
Specifically, the number of people receiving ‘Pandemic Unemployment Insurance’ continues to surge — jumping from 13.9 million the week of June 20 to 14.3 million the week of June 27.
More broadly, the number of Americans receiving some form of unemployment support was at 32 million as of the June 27 week. Now just imagine how much that number is going to spike in July with states reimposing restrictions to combat the recent spike in COVID-19 cases.
As the Federal Reserve noted in its ‘Beige Book’ report this week on economic conditions, covering the period until July 6, “Job turnover rates remained high, with contacts across Districts reporting new layoffs.”
The report said business contacts in nearly every regional Fed district cited difficulty in bringing back workers because of health and safety concerns, childcare needs, and generous unemployment insurance benefits.
It also noted that many businesses who have been retaining workers with help from the governments ‘Paycheck Protection Program’ said that going forward, “the strength of demand would determine whether they can avoid layoffs.”
U.S. Retail Sales Rebound But Will COVID Spike Derail Recovery? Manufacturing Sector Continues Steady Uptick
Spending by the U.S consumer will be a key determinant of how quickly the economy bounces back from the worst slowdown since the Great Depression. The Fed’s Beige Book noted that “retail sales rose in all Districts, led by a rebound in vehicle sales and sustained growth in the food and beverage and home improvement sectors.”
This was supported by data released by the Census Bureau this week, which showed June U.S. retail and food services sales jumped 7.5% from May, and was 1.1% higher than June 2019. It is worth pointing out, however, that total sales for the April through June period is 8.1% less compared to the same period a year ago. The bonanza for online retailers continued, with nonstore retail sales up 23.5% from June 2019.
Retail sales were up a strong 6.7% excluding automotive and gasoline sales. Clothing stores saw their sales soar by 105% in June from May, as did auto dealers (+8.2%), furniture stores (+32.5%), Electronics (+37.4%), and Sporting Goods stores (+26.5%).
The manufacturing sector is also awakening from its lockdown slumber, with data from the Fed this week showing industrial production rose 5.4% in June following a 1.4% rise in May. Manufacturing output jumped 7.2%, with the largest gain — +105%— in motor vehicles and parts, while factory production elsewhere rose 3.9%.
But that was then, and it remains to be seen if that momentum can be maintained in the face of more coronavirus cases. As the Fed warned in the Beige Book, “Outlooks remained highly uncertain, as contacts grappled with how long the COVID-19 pandemic would continue and the magnitude of its economic implications.”
China’s Economy Grows In Q2 But Service Sector Lagging Behind
In true ‘First In First Out’ fashion, China reported this week that activity in the world’s second largest economy grew by 3.2% in the second quarter, although it doesn’t completely erase the 6.8% decline in Q1.
Industrial production increased by 4.4% in Q2, following a 8.4% contraction in Q1, while agricultural production grew by 3.9%.
The recovery has not been as rapid in the service sector, with activity increasing by just 1.9% in Q2 following a 5.2% drop in Q1. In particular, retail sales fell by 3.9% in Q2, with sales down 1.8% in June alone compared to June 2019.
Central Bank Roundup: Pandemic’s Unpredictability Keeps Policymakers On Their Toes
Many central banks around the world held policy meetings this week, and its becoming increasingly apparent the unpredictable nature of the ongoing pandemic will mean substantial monetary policy support (i.e. low interest rates) for quite some time.
The Bank of Canada chose to leave its target interest rate unchanged, but warned that the economy “will continue to require extraordinary monetary policy support” as it begins to recuperate. It vowed to keep its policy interest rate at the effective lower bound until economic slack is absorbed so that its 2% inflation target is sustainably achieved. To reinforce this commitment and maintain downward pressure on interest rates, the BoC is continuing its large-scale asset purchase program at a pace of at least C$5 billion per week of Canadian government bonds.
The European Central Bank’s Governing Council also met this week. They chose to leave interest rates unchanged as well, and will continue bond purchases under its €1.4 trillion pandemic emergency purchase programme (PEPP). The ECB said it will conduct net asset purchases under the PEPP until at least the end of June 2021 and, in any case, “until it judges that the coronavirus crisis phase is over.” During the press conference following the meeting, ECB President Christine Lagarde cautioned that “ the balance of risks to the euro area growth outlook to remain on the downside,” and that “ample monetary stimulus remains necessary to support the economic recovery and to safeguard medium-term price stability.”
A similar tone was struck in the statement by the Bank of Japan’s Policy Board following its meeting this week. It left its highly accomodative interest rate policy in place, and will continue its aggressive purchases of both government and corporate bonds — as well as providing financing to companies affected by the pandemic. “For the time being, the Bank will closely monitor the impact of the novel coronavirus (COVID19) and will not hesitate to take additional easing measures if necessary, and also it expects short- and long-term policy interest rates to remain at their present or lower levels,” it said.
The Bank of Korea also made no change to its interest rate policy, and in a nod to the highly uncertain world we now live in, said “looking ahead, the Board sees global economic growth and global financial markets as likely to be affected largely by the evolution of the pandemic, as well as by the effects of national policy responses.”
“As economic growth is expected to be sluggish and inflationary pressures on the demand-side are forecast to remain weak due to the COVID19 pandemic, the Board will maintain its accommodative monetary policy stance,” it added.
Indonesia’s Central Bank did cut key interest rates this week, saying it was necessary to fuel the country’s recovery from the pandemic. “The global economic contraction is persisting, accompanied by a slower global economic recovery than previously expected,” it warned, citing the resurgence of COVID-19 cases in several countries, including the United States, Brazil and India. On the domestic front, it said indicators for June show early signs of economic recovery, but the economy has not returned to pre-pandemic levels of activity.