Tags: Coronavirus | Financial Markets | confidence | virus | control | economy

Confidence Will Plunge as Long as Virus Rages Out of Control

Confidence Will Plunge as Long as Virus Rages Out of Control


By Friday, 27 March 2020 12:16 PM Current | Bio | Archive

INDICATOR: March Consumer Sentiment and February Income and Spending

KEY DATA: Sentiment: -11.9 points/ Consumption: 0.2%; Disposable Income: +0.5%

IN A NUTSHELL: “Confidence is falling and it is likely to continue doing so, as the virus remains out of control.”

WHAT IT MEANS: The first measures of the impact of Covid-19 and the attempts to control it are just now starting to come out. The University of Michigan’s Consumer Sentiment Index fell sharply in March. This was the fourth largest drop, beaten only by the onset of the Great Depression, the 1980 recession and Katrina. Both the current conditions and expectations sub-indices declined a similar amount. Still, the headline number doesn’t really tell the whole story. Disbelief in the extent of the problem persisted into early March and it took a while for reality to set in. Only in the past two weeks has confidence begun to fall off the cliff. A chart of the seven-day moving average of the index puts it at about twenty points lower than the headline number. If the economy continues to be shutdown through April, as expected, look for another twenty point or more drop in sentiment. That would be the largest decline on record and would likely take the index into deep recession range.

The consumer was in pretty good shape going into the crisis. Income rose sharply in February, led by decent increases in wages and salaries. However, spending did not keep up. Consumption rose moderately, but only because services demand surged. Purchases of goods, on the other hand, were down. That is actually good news in that the savings rate rose to 8.2%, which shows that households were stashing away funds for a rainy day. For many, the hurricane has arrived. Hopefully, they will have some funds to weather the storm.

MARKETS AND FED POLICY IMPLICATIONS: Confidence is collapsing, but I am not sure you can say we are in panic mode. There are still parts of the country that are far from being shutdown and that should continue. Large segments of the country are operating near normal. Still, as noted in the report, confidence numbers are likely to fall through April and even May. With people stuck in houses, consumption is likely to have tanked in March and fell even further in May, even as the checks go out. And, of course, we simply don’t know where another virus hotspot will break out. To the extent that the virus knows no boundaries and travel across states has not been stopped, it is likely other areas will start seeing outbreaks. For example, the City of Easthampton, Massachusetts, a small town about fifteen miles north of Springfield MA and about ninety miles west of Boston, recorded its fourth COVID-19 case just this week. If a location in the middle of not that much (no insult intended, I have relatives there) can be just starting to see an outbreak, it is likely other areas will soon begin suffering growing numbers of cases as well. If the virus starts showing up in those states and metro areas that have largely been spared, confidence is likely to plummet to some of the lowest levels on record. We can hope that doesn’t happen but have to plan for the worst. Thus, don’t expect consumer spending to do much as there is only so much take out and Amazon that people can handle.

As for the checks that are going out, they are a good first step but we have to cautious about how much will be spent. Those who have lost their jobs will spend the money. Those families who have been living week to week, paycheck to paycheck will spend the money. But as I pointed out during the worst time of the Great Recession, a ten percent unemployment rate also means that ninety percent of the labor force is still working. The extent of the hole we dig will be determined by the actions of those that are still working. That is where confidence comes in, as we need the people who have jobs to spend, not hunker down. A generalized, nationwide collapse in confidence would likely mean it would take an extended time to recover. The V-shaped recovery might kick in, but it could take several quarters if the virus spreads more widely. That is my worst fear, as I have been forecasting a V-shaped recovery to begin by late this year or early next at the latest.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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Confidence is falling and it is likely to continue doing so, as the virus remains out of control.
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Friday, 27 March 2020 12:16 PM
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