Research

Markets hopeful
despite COVID-19
fallout

Unemployment claims over the past four weeks have virtually wiped out all the gains of the last expansion. Retail sales have plummeted, and manufacturing is also feeling the pain. Yet the markets found something to cheer.

April 20, 2020

Unemployment claims over the last four weeks totaled roughly 22 million. Net job gains from trough to peak during the last expansion totaled about 22.8 million. While not apples-to-apples because one is a gross measure and one is a net measure, the economy created few jobs during that four-week period. Relative to the peak employment from February, job losses total roughly 14.4%, or about 1 in 7 jobs. Using a rough, imperfect estimate, unemployment now lurks near 18% though it remains uncertain what the official unemployment rate will show next month. 

Record drop in retail sales

An imploding labor market helped monthly retails sales decline by the largest amount on record in March, falling by 8.7% versus February. The details show a consumer base focused on non-discretionary items and trying to avoid entering physical stores. Panic buying produced a 26.9% increase in grocery-store sales. Non-store sales (online purchases) grew by 3.1%. Other discretionary categories showed substantial decreases. Sales at clothing stores declined by 50.5%, at vehicle dealers by 27.1%, at bars and restaurants by 26.5%, and at sporting goods stores by 23.3%. Most states only initiated lockdowns and shutdowns in mid-March and panic buying has largely subsided, hinting at severe contractions in retail sales in the second quarter. 

Manufacturing not immune to coronavirus fallout

The manufacturing sector has also suffered due to the coronavirus. Industrial production decreased by 5.4% in March, the largest monthly drop since 1946, with widespread declines. Factory activity will likely fall further amidst disruptions to the global supply chain and a deteriorating economic outlook. In another sign of idled economic activity, the capacity utilization rate fell to 72.7% from 77%, roughly 7% below its long-run average. The utilization rate measures the percentage of the U.S.’s productive capacity in operation. 

Government attempting to plug economic hole

With consumer and business activity plummeting, the government is attempting to step into the void left by severe reductions in consumption and investment. Treasury debt will fund the roughly $3 trillion fiscal stimulus plan (enacted thus far), which will push the gross debt/GDP ratio up from about 107% to about 121% in the coming quarters. In the short run, concern remains minimal because issues tend to arise around ratios of 250% or higher. Moreover, interest rates are hovering near historically low levels which makes servicing the debt relatively easier. But crises like the current one cause government debt levels to spike and remain elevated even after a crisis abates. In the long run, the federal government will need to address this issue. 

Markets remain hopeful

Despite worsening data, markets remained relatively upbeat. Last week the S&P 500 rose by 2.7% and now sits roughly 28% above its March 23 trough. Markets cheered a few developments. The president told governors that they could begin reopening businesses in their states by May 1 or earlier, though exact timing remains uncertain. Data suggested that COVID-19 patients, even those with severe cases, are responding positively to the experimental drug remdesivir. And Boeing, one of the country’s biggest manufacturers, said it planned to resume aircraft production in Washington which would bring roughly 27,000 employees back to work.