A Somber Tone

Chief Economist Scott Brown discusses current economic conditions.

In his May 13 webcast on the economic outlook, Federal Reserve Chairman Jerome Powell struck a cautious tone. That mood was reinforced by the economic data reports that followed. The economic outlook depends on the virus and efforts to contain it. There’s hope that monetary and fiscal support will carry us through and the virus will be checked. However, economic improvement may take time and fall short of a full recovery. Many will fall through the cracks and deep recessions create long-lasting damage.

Powell noted the unprecedented speed and scope of the current downturn, “significantly worse than any recession since World War II.” The Fed’s policy response was quick and forceful. The Fed slashed short-term interest rates, restarted asset purchases, restarted credit and liquidity facilities that it used during the financial crisis, and launched some new ones. However, according to Powell, these efforts “may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks.” He cautioned that “the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems.” Powell indicated that further fiscal support will be needed, noting that while this could be costly, “it will be worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.”

“While we are all affected” by the economic effects of the pandemic, Powell noted, “the burden has fallen most heavily on those least able to bear it.” The Fed conducts a survey of consumer finances every year. The results for 2019, posted last week, showed that 16% of adults were unable to pay all of their monthly bills at the time of the survey and 25% skipped medical care (a visit to a doctor or dentist) because they couldn’t afford the cost. To gauge the effects of the COVID-19, the Fed conducted a supplemental survey in early April, which showed that 19% reported either losing a job or experiencing a reduction in work hours in March. Nearly 40% of people working in February with a household income below $45,000 reported a job loss in March.

While the loss of labor income has been partly offset by “recovery rebate” checks and unemployment benefits, personal income slipped 2.0% in March and is expected to have fallen further in April (personal income and spending figures are set to be released on May 29). The index of (private- sector) aggregate weekly payrolls (from the employment report) fell 11.0% in April.

Retail sales fell more than expected in April, down 23.4% since February. The two-month decline was especially pronounced in clothing stores (-89.3%), home furnishings (-67.4%) electronics and appliances (-64.9%), restaurants (-50.5%), sporting goods (-49.0%), department stores (-44.7%), and auto dealerships (-36.5%). Sales at non-store retailers, which include online shopping, rose 13.7% between February and April (+21.6% y/y). Sales at grocery stores were mixed (up 28.6% in March, down 13.2% in April). Gasoline sales fell 40.5% in the last two months, although much of that reflected a 29.0% decline in gasoline prices.

Scott Brown
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