US Durable Goods Orders March Preview: Ominous portents for consumption

Orders for long-lasting consumer and industrial goods are expected to confirm that a massive retreat in consumption is underway as the consumer and retail sectors reel from a historic collapse in employment.  

Durable goods order are forecast to plunge 11.9% in March, the largest drop in six years. Non-defense capital goods orders, a proxy for business spending, are expected to fall 5.7% in their biggest decline since the financial crisis. Earlier in the month the Census Bureau reported that retail sales decreased 8.7% in March.

More than 22 million Americans have been forcibly laid off in the past four weeks by government mandated business closures as part of the public health effort to retard the spread of the Coronavirus.  Another four million workers are expected to file for unemployment insurance this week bringing the total to 15.9% of the 164.6 million member labor force.

Even though the vast majority of the unemployed receive benefits, the loss of upwards of half their buying power combined with the social restrictions and store closures in much of the country have crippled an economy that just six weeks ago had near record employment and the longest expansion since the Second World War.

US Economic growth

The US economy had been expanding at a 2.7% annualized rate for the first quarter in mid-March according to the Atlanta Fed GDPNow model.  The estimate is now -0.3% and the bank will release an updated GDP figure on Friday April 24.

It is widely anticipated that the collapse in spending in the last two weeks of the month will be enough to drag the entire quarter into the negative. The Reuters survey of economist conducted for the April 29 first quarter GDP release forecasts a 4.1% contraction.  Estimates for the second quarter growth  range from -5% to as low as -30%.

The severe contraction in business spending is an indication that even early in the crisis managers were taking extreme defensive measures to protect their operations.

Shutdown economics

A number of states in the south and mid-west are beginning to reopen commercial activity. But before this movement can become widespread enough to reverse some of the economic toll of the closures the local authorities will have to demonstrate that the lifting of restriction has not appreciably increased the number of Coronavirus cases and fatalities.

The debate within the US as to the most effective response to the virus, a number of states in the middle of the country never ordered social limitations or closed businesses, is about to be assisted to conclusion by the results of these initial liberalizations.

If the partial reopening of Georgia and Florida are successful then the future may look quite different at the end of May than it does now.

Conclusion and the dollar

There has never been an employment and consumer spending debacle like this in the economic history of the United States.

The estimates of the longevity and cost of the pandemic are necessarily long on assumptions and short on facts. At the moment projections for consumption and GDP in the second quarter rely on extrapolation from the partial impact in March.  For April’s numbers and probably those of May as well, that seems a reasonable basis for speculation, but beyond that the variables depend on facts that are in constant flux.  

There is growing public pressure in many states that are far from the epicenter in New York and have never seen many virus cases or deaths to permit a return to work.  As the financial situation of many people becomes ever more straitened, those demands will only rise in volume.

In the international arena the US dollar will keep its safety status until there is clear evidence not only that the pandemic is ebbing but that the world’s economy can successfully restart.