- U.S. recovery has begun but is likely to be slow and bifurcated
- Q1 U.S. current account deficit expected to narrow while dollar sinks on Fed’s liquidity flood
U.S. recovery has begun but is likely to be slow and bifurcated — St. Louis Fed President Bullard on Thursday said that he hopes April marked the trough of the economic meltdown. However, he added, “I definitely don’t think we’re out of the woods.”
The May economic data seen so far suggests that the U.S. economy hit bottom in April. For example, retail sales rose sharply by +17.7% m/m in May, although it would need to rebound by another +9% to get back to January’s record high. Manufacturing production in May showed a modest increase of +3.8% y/y, but has a long way to go just to overcome the -20.8% plunge seen in the two previous months.
The ISM indexes showed a mild improvement in May, indicating that business confidence is on the rebound. The ISM manufacturing index in May rose by +1.6 points from April’s 11-year low of 41.5. The ISM non-manufacturing index in May rose by +3.6 points from April’s 11-year low of 41.8.
The 2nd-quarter, which will be over in just 1-1/2 weeks, will see the biggest quarterly GDP drop in American history. The consensus is for a drop of -11.4% q/q (-35.0% q/q), which would produce a peak-to-trough drop in the first half of -11.4% (when added to the -1.2% q/q drop seen in Q1). A peak-to-trough drop of -11.4% in the first half would be more than twice the Great Recession’s decline of -4.0% and would qualify for the common definition of a depression of a drop of more than -10%.
The consensus is that U.S. GDP will then snap back by +4.6% q/q (+19.9% q/q annualized) in Q3 and by +2.1% q/q (+8.5% q/q annualized) in Q4. However, overall GDP in 2020 is expected to fall sharply by -5.7%. The consensus is that it will take two years to regain the GDP losses seen in 2020.
While the U.S. economy appears to have bottomed out in April, it will take a long time for the economy to fully recover, particularly since there is no end in sight for the pandemic. The economy is currently benefiting from a surge of pent-up demand from people who were locked down for 2+ months. However, that surge is likely to dry up soon, particularly since there will apparently be no more stimulus checks from Washington, and since the $600 per week of bonus unemployment benefits appears destined to expire on July 31.
The U.S. labor market remains in a debacle with 19 million more people than usual collecting unemployment benefits. Moreover, the unemployment figures are much higher than 19 million since there are many people who are unemployed but who don’t qualify for unemployment benefits because they are self-employed, semi-employed, or previously worked in the underground economy.
In fact, the U.S. recovery will be highly bifurcated between people who still have their jobs and are doing fine, versus people who are unemployed (or underemployed) and are struggling to keep up with mortgages, car loans, and credit cards.
This bifurcated recovery is already being seen in the housing market. There has been a surge of people out looking for homes to buy, apparently because they either need a larger house so that they can work from home or because they want to escape from multi-family residences during the pandemic. The surge in home-buying interest is seen by the fact that the MBA mortgage purchase sub-index has surged by +77% in the past nine weeks and has hit a new 11-1/2 year high.
The surge in home buying interest, particularly during a time when there is a low supply of homes on the market, is keeping home prices high. However, in a matter of few months, mortgage forbearance will start running out and people who are behind on their mortgage will be foreclosed upon. Once the deluge of foreclosed homes hits the market, then home prices are likely to start dropping, hurting overall household wealth and confidence for all homeowners.
The Fed recognizes that it will be a long road to recovery, which is why Fed Chair Powell has been pleading with Congress for more stimulus. The Fed is also still going full-bore with its monetary stimulus measures even though the strong stock market makes it look as though the crisis is over. The Fed’s pessimistic outlook is confirmed by the fact that the FOMC and the markets expect the funds rate to remain unchanged near zero at least into 2023.
Q1 U.S. current account deficit expected to narrow while dollar sinks on Fed’s liquidity flood — The consensus is for today’s Q1 current account deficit to narrow to -$102.9 bln from -$109.8 bln in Q4, remaining much narrower than the 8-quarter average of -$123.7 bln. However, the pandemic didn’t hit the U.S. in full force until Q2, which is when the current account deficit is likely to widen sharply. The monthly U.S. trade data has already shown that exports in April fell sharply by -27.7% y/y, and were down by even more than the -22.4% y/y decline in imports.
The persistent U.S. current account deficit continues to be long-term bearish factor for the dollar. However, the dollar has largely been able to shake off the negative effects of the current account deficit because there continues to be strong demand among foreign investors for U.S. financial assets and direct investment in plants and real estate, not least because there are $12 trillion of negative-yielding securities globally.
On a short-term basis, the dollar saw a sharp rally in March as global investors scrambled for dollar liquidity during the crisis. However, the dollar has since fallen back since the Fed has thoroughly saturated the world with dollar liquidity.
