Yahoo Finance An unprecedented drop in economic activity was 'relatively' good news: Morning Brief
Friday, April 24, 2020
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Data implying a 12% GDP decline is now good news
Economic news has been grim.
And the data are likely to get worse, even if real economic activity is approaching its nadir.
But on Thursday one economic data report that pointed to an “unprecedented” decline in activity in both the U.S. services and manufacturing sectors might’ve been “relatively” good news.
IHS Markit’s flash reading on business output in April published Thursday hit a record low, with the composite output reading falling to 27.4, the lowest on record. Readings over 50 for this measure indicate expansion and readings below 50 indicate a contraction in activity.
“Private sector firms in the U.S. signaled an unprecedented decline in business activity in April, with manufacturing and service sector companies registering marked contractions of output amid the outbreak of coronavirus disease 2019 (COVID-19),” the report said. After an initial drop in this index to 40.9 in March, April’s data confirms that the bottom is indeed dropping out of U.S. economic activity.
“The COVID-19 outbreak dealt a blow to the US economy of a ferocity not previously seen in recent history during April,” said Chris Williamson, chief business economist at IHS Markit. “The deterioration in the flash PMI numbers indicates a rate of contraction exceeding that seen even at the height of the global financial crisis, with jobs also being slashed at a rate far exceeding anything previously recorded by the survey.”
But this largest-ever drop in activity seen from IHS’ report points towards a falloff in GDP growth during the second quarter that is not quite as grim as some economists are forecasting.
Michael Pearce, senior U.S. economist at Capital Economics, said in an email Thursday that IHS Markit’s report suggests the economy will contract at an annualized rate of 12% during the second quarter. Pearce and the team at Capital Economics, however, expect to see a 40% annualized decline.
“We remain skeptical that the surveys are providing an accurate gauge of how bad the decline in GDP will be, principally because of the problems associated with such high non-response rates to surveys conducted during a time when many businesses are shuttered,” Pearce writes.
“Nevertheless, even though the April reading is a record low, it should be viewed as ‘relatively’ good news.”
Though as we’ve covered previously, qualitatively surveys in particular are challenged for the exact reason Pearce notes — many offices are closed so there is no one to actually respond to these questionnaires.
And more quantitative data on the health of the U.S. economy have also been painting pictures that are unambiguously horrific.
On Thursday, the weekly report on initial jobless claims was also released, revealing that another 4.42 million Americans filed first-time claims for unemployment insurance last week. Over the last five weeks, more than 26 million people have filed initial claims. The four-week average of claims is now nine times higher than the financial crisis peak.
“The claims data are consistent with our forecast for job losses of 24 million in April and a spike in the unemployment rate to 14% while the labor force participation falls below 60%,” said Greg Daco at Oxford Economics. “We expect total job losses during the pandemic to approach 30 million. Importantly, we expect the recovery in the labor market to be slow and don’t expect employment to return to 2020 levels until early 2022.”
And with an outlook like that, we’ll take any “relative” optimism we can get.
By Myles Udland, reporter and co-anchor of The Final Round. Follow him at @MylesUdland
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10 a.m. ET: University of Michigan Sentiment, April final (68.5 expected, 71.0 prior)
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