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  • Some forecasters now expect 10% drop in U.S. economy from peak, edging towards the definition of a “depression”
  • Treasury’s new central-bank repo program is supportive for T-notes and negative for the dollar
  • Today’s U.S. ISM manufacturing index won’t capture the full extent of pessimism 
  • U.S. ADP jobs will show its first major decline


Some forecasters now expect 10% drop in U.S. economy from peak, edging towards the definition of a “depression”
 — Goldman Sachs on Tuesday revised its Q2 U.S. GDP forecast downward to -34% (q/q annualized) from -24%.  However, Goldman raised its Q3 GDP forecast to +19% from +12% due to expectations for a relatively quick recovery.  Other forecasters fear a much weaker recovery as the country limps along with the high likelihood for at least regional virus outbreaks in the coming months.

Goldman’s forecast for GDP declines of -9% (q/q annualized) in Q1 GDP and -34% in Q2 imply a peak-to-trough decline in U.S. GDP of about -10.75% (i.e., -2.25% q/q in Q1 plus -8.5% q/q in Q2).  There is no official definition of a depression, but one widely-used definition is a peak-to-trough drop in GDP of more than -10%.  Goldman’s forecast therefore narrowly implies a depression under that definition.

However, if the current drop in economic activity only lasts a few months, then it would not meet the generally-accepted idea of a depression, which is a long and extremely sharp drop in an economy.  This would be a new type of deep, but quick, recession.

Due to the widespread shutdowns across the country, it is easy to visualize the U.S. economy losing 10% of GDP in the first half, which would suggest that the economy was running at about 90% of normal capacity.  A 10% drop in the U.S. economy would be more than double the -4.3% peak-to-trough decline seen in the 2007/09 Great Recession, but only one-third of the Great Depression’s slump of about -30%.

In any case, GDP forecasts are all over the map, and there is no way at this point to know how the pandemic will play out and how long the U.S. economy will have to remain partially shut down.  Forecasters looking for a Q2 GDP drop of at least -30%, other than Goldman, include Deutsche Bank (-33%), NatWest (-32.1%), and Morgan Stanley (-30.1%), according to Bloomberg News.

Forecasters looking for smaller Q2 GDP drops include Morgan Chase (-25%), TD Securities (-25%), Wells Fargo (-14.7%), Bank of America (-12%), Citigroup (-12%), Credit Suisse (-12%), Oxford Economics (-11.9%), UBS (-9.5%), and Bloomberg Economics (-9%).  The median of that overall forecast group for Q2 GDP is -14.7%.

Treasury’s new central-bank repo program is supportive for T-notes and negative for the dollar — The Fed on Tuesday announced that it will have a Treasury repo facility available to foreign central banks in operation by April 6.  That facility will allow foreign central banks to use their Treasury securities as collateral against dollar loans, which those central banks can then use to loan out dollars to their domestic banks and corporations.

The facility is aimed mostly at smaller central banks that weren’t included on the list of major central banks that recently received new and expanded dollar swap lines from the Fed.  China’s central bank could be a good candidate for the new program since the PBOC didn’t previously get a dollar swap line from the Fed, and since China holds a huge amount of Treasury securities that it could use in the repo facility.  The facility is being viewed mostly as a last resort since it is relatively expensive at 25 bp over the IOER rate of 0.10%, for a total cost of 35 bp.

The facility is supportive for T-note prices because foreign central banks will have another way to temporarily swap their Treasury securities for dollars, rather than being forced to sell large quantities of Treasury securities into the Treasury market.  The new repo facility should also take some upward pressure off the dollar because the facility will provide another way to satisfy the huge global demand for dollar liquidity.

Today’s U.S. ISM manufacturing index won’t capture the full extent of pessimism — The consensus is for today’s March ISM manufacturing index to show a -5.3 point decline to 44.8, adding to Feb’s -0.8 point decline to 50.1.  However, today’s report for March will certainly not capture all of the pessimism in the manufacturing sector since most of the state-wide stay-at-home orders did not start until mid to late March.  The April ISM manufacturing and non-manufacturing reports are therefore likely to be much worse than the March reports.

The fact that manufacturing confidence didn’t drop much in early March can be seen in the already-reported news that the preliminary-March Markit U.S. manufacturing PMI fell by only -1.5 points to 49.2.  Today’s final-March Markit index is expected to fall -1.2 points from early-March to 48.0, leaving an overall -2.7 point decline from February.

China’s February manufacturing PMI plunged by -14.3 points to 35.7, which is probably more like what can eventually be expected for the U.S. ISM reports.  China’s manufacturing PMI recovered sharply by +16.3 points to 52.0 in March, but that was only because March looked better to manufacturing executives than February.  Also, China was hit by the virus in January and was able to contain the virus by March.  The virus in the U.S., by contrast, is presently spreading at a very rapid rate with no near-term prospect for containment.

U.S. ADP jobs will show its first major decline — The consensus is for today’s March ADP employment report to show a drop of -150,000.  This will be the start of a sharp drop in jobs since millions of Americans are in the process of being laid off from their jobs.  Last Thursday’s report showed that initial unemployment claims jumped to a record high of 3.3 million just in the second week of the labor meltdown.

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