U.S. economy slows
under coronavirus cloud

As American consumers avoided discretionary spending, retail sales suffered significantly in April. Combined with massive job losses for low-income families, it’s a recipe for a faltering economy with a few bright spots.

May 19, 2020
April retail sales implosion bodes ill for second quarter growth

Monthly retail sales collapsed in April, declining by 16.4%, nearly doubling previous the record pullback recently set in March. After a knee-jerk reaction to the pandemic in March, consumers are settling into a pattern that reflects the current situation. Online purchases increased by 8.4% in April as consumers either avoid physical stores or look for replacement channels due to store closures. Grocery store sales declined by 13.2%, retreating after a spate of panic buying in March. All categories excluding ecommerce suffered pullbacks, but discretionary categories continued to suffer the most stinging declines: clothing store sales down 78.8%, electronics and appliance store sales down 60.6%, furniture and home furnishing stores down 58.7%. The marked overall decline portends trouble for economic growth in the second quarter if retail sales do not improve as states begin to reopen.

Inflation measures show deflation, reflecting lack of demand

Inflation measures for April generally showed deflation, reflecting the weakness in demand from both consumers and businesses observed in the retail data. The headline and core consumer price indexes (CPI) both declined. That brought the year-over year growth rate for headline CPI to a near standstill while core CPI fell to its lowest year-over-year growth rate since April 2011. Meanwhile the headline and core producer price indexes (PPI) both declined by the largest amount on record, well below expectations. 

Concentration of job loss among low-income households

The Federal Reserve (Fed) released a survey last week showing that roughly 40% of people in households making under $40,000 per year lost their jobs in March, reflecting the damage the lockdowns and shutdown are imparting on low-income families. This dynamic reduces demand because lower-income households typically spend most of their income and a loss of that can severely reduce their spending. 

Fed not out of ammunition

Noting the risks to the economy from such disruption, Chairman Powell affirmed that the Fed continues to implement policy as the situation unfolds. He emphasized that the Fed “by a long shot” has not run out of ammunition to help limit economic fallout, but also noted that the Fed remains far away from embracing negative interest rates. Powell also emphasized that the downside risks remain severe, with the potential to cause lasting harm to the economy. 

Fiscal policy outlook currently uncertain

Chairman Powell also strongly reiterated that Congress should continue to implement fiscal policy measures to help support the economy. The House recently passed a roughly $3 trillion spending package, which the Senate seems unlikely to pass. The potential for further stimulus exists, but negotiations recently turned somewhat more contentious.