Fed's Beige Book expected to show hobbled U.S. economic recovery
U.S. ADP report expected to show the fourth consecutive monthly rise in jobs
U.S. factory orders expected to show third monthly increaseFed’s Beige Book expected to show hobbled U.S. economic recovery — Today’s Fed Beige Book will provide an update for FOMC members ahead of their upcoming Sep 15-16 meeting on how the U.S. is faring during the ongoing pandemic.
The U.S. Covid infection rates in recent weeks have fallen as Americans learn how to reduce the risks from the pandemic. However, new infection rates remain high and major sectors of the U.S. economy remain hobbled by the pandemic such as restaurants, bars, health clubs, sports, entertainment, and travel. The U.S. economy will not be able to return to normal until there is an effective and widely-available vaccine, which doesn’t seem likely until next year.
U.S. GDP in the first half of 2020 plunged by -10.4%, which was 2-1/2 times worse than the Great Recession’s peak-to-trough decline of -4.0%, although not nearly as bad as the -26% decline seen during the Great Depression in 1929-1933. The -10.4% decline in the first half of 2020 qualified for the common definition of a depression of a GDP decline of more than 10%.
However, the good news is that the economy is expected to make a partial comeback in the second half of 2020. The consensus is for GDP gains of +4.7% q/q in Q3 (+20.1% q/q annualized) and +1.5% q/q in Q4 (+6.1% q/q annualized), which adds up to a +6.2% GDP increase in the second half of 2020. Still, that will not be enough to fully recover the first-half loss and the consensus is for GDP in calendar 2020 to drop -5.0%. The consensus is for GDP to then rise by +3.7% in 2021, still not fully overcoming the 2020 decline.
The markets are expecting the FOMC at its upcoming meeting on Sep 15-16 to leave its key policy variables unchanged with the funds rate target range at 0.00%/0.25% and its QE program at $120 billion per month. The big question for the September meeting is whether the FOMC will deliver more specific interest rate and QE guidance.
Fed Chair Powell last week announced that the Fed as part of its long-term structural policy review adopted a flexible average inflation target. The Fed said that means that after a period of below-target inflation, the Fed will target inflation above 2% for a time to make sure that inflation over the long-run averages closer to the +2.0% target.
However, the Fed has yet to explain exactly how that general idea will translate into specific policy moves. The markets are hoping that the FOMC on Sep 15-16 will deliver more specific guidance, such as saying that rates will remain at current levels until inflation is on its way above 2% and until the unemployment rate falls below a specific threshold.
That guidance may give the markets a better idea of when the FOMC will actually start raising interest rates. Right now, the federal funds futures markets shows that the markets are not expecting a rate hike through 2023.
The euro-dollar futures market, which has contracts that extend much farther out into the future, shows that the markets are not fully expecting the first +25 bp rate hike until 2024. The Eurodollar futures market shows that the markets are expecting only an overall 100 bp Fed rate hike by 2028.
U.S. ADP report expected to show the fourth consecutive monthly rise in jobs — The consensus is for today’s Aug ADP employment report to show an increase of +950,000 jobs, adding to July’s recovery of +167,000.
ADP jobs recovered by a total of 7.8 million jobs in May-July. However, jobs would have to recover by another +11.9 million to fully recover the -19.7 million job loss seen in March-April and get the U.S. job level back to the record high seen in February. It will likely take at least several years for the U.S. to get back to that job peak. After the Great Recession, it took six years for the job level to recover to its previous peak.
On the labor front, the markets are mainly looking ahead to Friday’s Aug unemployment report. The consensus is for Friday’s Aug payroll report to show an increase of +1.400 million, adding to July’s increase of +1.763 million. Payrolls in May-July recovered by a total of 9.3 million jobs, recovering only 42% of the -22.2 million job plunge seen in March-April. Payrolls need to rise by another 12.9 million in order to get the job level back to the record high of 152.5 million seen in February.
The consensus is for Friday’s Aug unemployment rate to fall by -0.4 points to 9.8%, adding to July’s -0.9 decline to 10.2%. Even if Friday’s unemployment rate falls to 9.8% as expected, the rate will remain near the peak of +10.0% seen during the Great Recession. The current unemployment rate is roughly triple the 3.5% rate seen in February before the pandemic battered the U.S. economy.
U.S. factory orders expected to show third monthly increase — The consensus is for today’s July factory orders report to show an increase of +6.0% m/m, adding to June’s increase of +6.2% and +4.4% ex-transportation.
Today’s expected +6.2% increased in July factory orders would be a step in the right direction. However, factory orders would have to increase by a total of +13.6% to match the pre-pandemic level seen in February.
The good news is that manufacturing executives are expressing more confidence. Yesterday’s Aug ISM manufacturing index rose +1.8 to a 1-3/4 year high of 56.0. Also, the Aug ISM manufacturing new orders sub-index rose by +6.1 points to a new 16-year high of 67.6.