Implications:  While the ISM non-manufacturing index remained in expansion territory in March, don't expect that to last.  The data will, quite frankly, turn very ugly in the coming months as the Coronavirus shutdown brings many parts of the economy to a near standstill.  Comments regarding the impact of the virus dominated survey responses, as healthcare companies reported trouble acquiring personal protective equipment, accommodations and food services companies noted significant demand disruptions, but construction and mining companies reported a less severe impact than initially expected.  In total, nine of eighteen companies continued to report growth in March, while seven reported contraction (two reported no change).  The two most forward-looking indices – business activity and new orders – showed the largest declines in March.  Orders dropped 10.2 points, the second largest monthly decline in the index's history dating back to the late 1990s, but remained in growth territory at 52.9.  The business activity index, meanwhile, fell into contraction territory with a reading of 48.0 vs the 57.8 reading in February.  Expect both measures to continue moving lower in the months ahead, showing contraction until the economy can start getting back to work.  The employment index dropped to 47.0 in March from 55.6 in February.  Here too, the data will get worse before it gets better.  Nonfarm payrolls plummeted 701,000 in March and April will have an even larger decline.  The key decision at hand – the trillion-dollar question as it relates to economic recovery – is when the U.S. will re-open for business. The longer the shutdown, the deeper the contraction, the greater the number of companies that won't survive.  That, in turn, means fewer jobs for the unemployed to return to, and a slower pace of recovery.  The one key measure of activity that moved higher in March was supplier deliveries, which surged to 62.1 from 52.4 in February.  A higher reading means companies have a greater demand for goods than the system is currently able to supply. The global supply-chain disruptions have slowed shipping and reduced production capacity around the world, and this will remain the case for the foreseeable future.  On the inflation front, the prices paid index declined to 50.0 from 50.8 in February (a reading of 50.0 means essentially no change in prices from the prior month).  A drop in fuel and steel prices was offset by rising costs for medical supplies and lumber.  There is no "right" path moving forward that will be generally agreed upon by the population.  It is not an easy decision by any means.  We fight two invisible threats, the virus itself and the economic carnage it leaves in its path.  The weeks ahead, while uncertainty continues to loom large, will prove a pivotal decision point for our nation's leaders.

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Implications:  Payrolls plummeted 701,000 in March and we expect an even steeper drop in April.  To put that in perspective, the steepest drop for any month in the Great Recession was 800,000 in March 2009.  This past month was almost as bad and it's about to get much worse.  Most of the losses were at restaurants & bars, where payrolls fell 417,000, but almost every major category of jobs declined.  The 417,000 decline at restaurants & bars was larger than the loss in that sector in the entire Great Recession.  Meanwhile, civilian employment, an alternative measure of jobs, that includes small-business start-ups (or the lack thereof) fell roughly three million in March.  The consensus expectation for March was for a payroll decline of only 100,000, as the government surveys that generate the jobs data covered early March, before almost all of the massive surge in jobless claims.  But in a normal month, pre-Coronavirus, employers hired about 5.8 million workers (gross, not net).  We think the data will ultimately show that hiring slowed down substantially in March.  In other words, the drop in jobs in early March wasn't really about layoffs, it was about a lack of hiring.  In April, it's going to be both.  The unemployment rate surged to 4.4% in March from 3.5% in February (tied for the lowest level since the 1960s).  Expect a jobless rate of 10%+ for April.  The unemployment rate would have been even higher in March except that the labor force shrank by 1.6 million, the largest decline for any month on record.  The participation rate (the share of adults who are either working or looking for work), fell 0.7 percentage points to 62.7%, the largest drop for any month since the 1960s.  This likely reflects people who want jobs but can't look for them given social distancing.  The one bright spot in the report was that average hourly earnings rose 0.4% in March.  But that gain is probably due to a lack of hiring in relatively lower-paying jobs.   Total hours worked in the private sector fell 1.1% in March, the steepest drop since March 2009.  So, even with the gain in average hourly earnings, total earnings fell 0.7%.  The US is feeling the pain associated with government-mandated shutdowns designed to limit the health damage from the Coronavirus.  Expect more pain to come in the months ahead, but a recovery starting later this year. 

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Source: St. Louis Federal Reserve FRED Database

Implications: Forget about trade for a minute.  Initial claims for unemployment benefits rose 3.341 million last week to 6.648 million, by far the largest increase and the highest level ever.  The previous record high for claims besides last week, was 695,000 back in October 1982; the highest level during the Great Recession of 2008-09 was 665,000.  Continuing claims for the week prior increased 1.245 million to 3.029 million and will also show another huge spike upward in next week's report.  These figures are the second wave of the massive layoffs resulting from government-mandated shutdowns of business.  Look for continued stratospheric levels for claims for at least the next couple of weeks as small business continues to grapple with mandated shutdowns.  The unemployment rate was 3.5% in February.  It should be higher in tomorrow's official report for March, but the survey was taken early in the month and so will not reflect the full extent of recent layoffs.  The unemployment rate for April (released May 8) will be substantially higher, potentially 10%.  Now back to trade. The trade deficit in goods and services came in at $39.9 billion in February.  Both import and export activity declined, but imports fell much faster, which is why the trade deficit shrank.  More important is that the total volume of trade (imports plus exports), which signals how much businesses and consumers interact across the US border. This measure declined by 1.5% in February and is down 2.8% versus a year ago.  In other words, we don't see the February decline in the trade deficit as particularly good news.  Expect a further slowdown in both imports and exports over coming months as the Coronavirus takes a toll along with the mandated shutdowns of business across the US and the world.  It's going to get ugly.  Today's data show the severity of the effects of closing businesses in China for the month of February.  Imports from China were down 31.5% for the month. In March and April, businesses around the world will be closed, which will roil the data even more.  Once the Coronavirus restrictions start to ease, imports and exports should rebound, boosted by new trade deals with key trading partners.  Today's report also showed that, for the sixth month in a row, the dollar value of US petroleum exports exceeded that of US petroleum imports. Horizontal drilling and fracking have transformed the global energy market and the US is no longer hostage to foreign oil.  In other news yesterday, cars and light trucks were sold at a 11.4 million annual rate in March, down 32.1% from February and down 34.1% from a year ago.  These declines reflect restrictions put in place in mid-March and so sales should be even lower in April, probably dropping below the 9.0 million annualized low point during the Great Recession in early 2009. 

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Implications:  The impact of the Coronavirus on factory sentiment was less than expected for March, with the ISM Manufacturing index coming in at 49.1, beating the forecast from every economics group.  Expect the index to get uglier in the months ahead, but for the time being, ten out of the eighteen industries surveyed reported continued growth in March, only six reported contraction, and two reported no change.  Comments from survey respondents were peppered with concerns over the Coronavirus, its likely impacts on supply chains, as well as the effects of the oil-price war.  The two most forward-looking indices – new orders and production – both moved lower in today's report.  New orders fell to 42.2 in March, the lowest since 2009, likely due to uncertainty about the near future.  Meanwhile, the production index declined to 47.7 in March from 50.3 in February, as a lack of new orders and delivery restrictions due to public health measures hit activity.  That said, recent news surrounding manufacturers converting their production lines to make ventilators, personal protective equipment, and other necessary items for the fight against the Coronavirus suggests some support for production and new orders going forward.  Regarding overseas supply chains, one respondent noted that Asian suppliers are getting back up to speed.  This was reflected yesterday in China's manufacturing PMI which rebounded sharply back into expansion territory, though it's always important to take Chinese numbers with a grain of salt.  That said, supply chain disruptions and delivery restrictions in the US have impacted the supplier deliveries index, which rose to 65.0 in March from 57.3 in February (remember, the supplier delivery index moves higher as delivery delays rise).  Finally, the employment index continued to decline in March, falling to 43.8.  This echoed the decline of 27,000 jobs in today's ADP employment report, reflecting the ongoing effects of government-mandated shutdowns of businesses.  We are forecasting a 145,000 drop in nonfarm payrolls for March but may adjust this estimate tomorrow morning once we see the latest figures on unemployment claims.  In other news this morning, construction fell 1.3% in February.  A rise in transportation projects was offset by broad-based declines elsewhere, led by commercial construction and manufacturing.  Finally, in recent news on the housing market, pending home sales, which are contracts on existing homes, rose 2.4% in February after a 5.3% gain in January.  Normally, these gains would signal a surge in closings in March.  But closings were unusually strong in February, perhaps a reaction by some buyers to the oncoming Coronavirus.  And now, given social distancing, closings in March could be relatively soft.  On the price front, the Case-Shiller index, which measures national home prices, rose 0.5% in January and is up 3.9% from a year ago, a slight deceleration from the 4.2% increase in the year ending in January 2019.  In the past twelve months, price gains have been the fastest in Phoenix, the slowest in New York and Chicago.  

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Total deaths in the US from COVID19 look like they'll hit at least 3,000 by the end of March.  A potentially brutal April lies ahead. 

In the meantime, the measures taken to limit deaths have temporarily tanked the US economy.  Initial claims for jobless benefits soared to 3.283 million per week, easily the highest ever.  The prior record was 695,000 in October 1982; the highest during the Great Recession was 665,000.

Policymakers have reacted to the economic damage with massive measures.  The Federal Reserve has reduced interest rates to nearly zero, has begged banks to use the discount window, embarked on unlimited quantitative easing, and is backstopping an unprecedented array of markets, including commercial paper, money markets, commercial mortgages, and municipal securities.

Meanwhile, we have a newly enacted "stimulus" bill that could total $2 trillion, possibly more.  These include IRS checks, a major expansion in unemployment benefits, as well as a broad combination of grants, loans, and loan guarantees for businesses (large and small), hospitals, schools, and state and local governments.

The federal budget deficit for this fiscal year, previously estimated by the Congressional Budget Office to be about $1.1 trillion, could easily run around $2.5 trillion, and that's without other major spending bills.  Since World War II, the largest budget deficit relative to GDP was 9.8% in 2009; but a $2.5 trillion deficit this year could be about 11.8% of GDP.

Of course, these monetary and fiscal measures are on top of the massive economic interference - designed to stem the virus -by governments at all levels.  The longer these measures persist, the greater the risk of atrophy setting in for small business across the country, making them less able to reopen in the future.  The loss of intangible capital would be enormous, the internal knowledge of how to get things done.  Slower economic growth in the post-COVID19 world would be the result.

It's important that the expansion of government is not made permanent.  The New Deal took annual federal spending from about 3% of GDP to about 10% of GDP (before World War II) and we never went back, or even close.  Policymakers need to avoid making COVID19 an excuse for another permanent leap upward in the size of government, which would erode future living standards versus where they would otherwise go.    

Once we have a vaccine, some things have to change.  Governments at all levels should consider "strategic health reserves" of masks, ventilators, respirators,...whatever is needed in an emergency, so we don't have to take drastic measures again.  Our recent response should not be a periodic feature of American life.

Dr. Fauci recently said there could be 100,000 – 200,000 deaths.  The mid-point would be 47 people per 100,000 residents, not much different from the number of people the US lost to the flu in early 1953, late 1957, early 1960, the peak of the 1968-69 Hong Kong Flu, or early 1976. 

Those episodes didn't permanently expand government and neither should this one.  In order to be better prepared in the future, we need a vibrant private sector, not a permanent expansion in government.

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist    

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Implications:  Consumer spending is going to get hammered during the Coronavirus Contraction for at least the next couple of months, but at least consumers headed into it with healthy back-to-back gains in their incomes.  Personal income rose 0.6% in February, matching January's strong increase.  The gain in January was led by private-sector wages and salaries and higher payments to farmers related to the Department of Agriculture's market facilitation program.  Higher incomes, in turn, continue to boost spending, which rose 0.2% in February.  Spending on services led consumer purchases higher in February, while spending on goods declined.  With spending up faster than income over the past year, some may be concerned that consumers were already financially stressed prior to the Coronavirus, but that isn't the case.  Households de-levered following the Great Recession, bringing financial obligations (think mortgages, car loans, etc.) to near multi-decade lows as a share of after-tax income.  A big part of this was the strong labor market, which had more people working more hours for more pay, fueling the growth in spending.  However, now that government-mandated shutdowns of businesses have begun to throw immense numbers of people into unemployment, as yesterday's unprecedented move in initial claims shows, the next few months of personal income reports are going to get ugly.  For the next couple of months, look for any gains in income to come from government transfers to individuals.  On the inflation front, PCE prices rose 0.1% in February and were up 1.8% from a year ago.  Core prices, which exclude food and energy, were up 0.2% in February and also up 1.8% from a year ago.  This is just below the Fed's target of 2.0%, but don't expect any normalization in policy anytime soon. The Fed is using every monetary tool it has to support the economy against the Coronavirus, including Quantitative Easing and reducing rates back to near-0%.  Expect price declines in March, but a pop in inflation later this year, the result of a combination of loose monetary policy while the government strives to keep people from working in order to combat the Coronavirus.  More money chasing fewer goods (and services) is a classic recipe for higher inflation.     

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Implications:  Forget about GDP for a minute.  Initial claims for unemployment benefits rose 3.001 million last week to 3.283 million, by far the largest increase and the highest level ever for weekly claims.  The previous record high for claims was 695,000, back in October 1982; the highest level during the Great Recession of 2008-09 was 665,000.  Continuing claims for the week prior increased 101,000 to 1.803 million, but will also show a huge spike upward in next week's report.  These figures are the first wave of the massive layoffs resulting from government-mandated shutdowns of business.  Look for continued stratospheric levels for claims for at least the next couple of weeks as small business continues to grapple with mandated shutdowns.  The February employment report had the unemployment rate at 3.5%; look for that rate to move substantially higher in the next few months.  Now back to GDP, where there was not much news.  The third reading for fourth quarter real GDP growth showed the same moderate 2.1% annualized pace of growth that was estimated a month ago.  Real GDP was up 2.3% versus a year ago.  "Core" real GDP, which strips out inventories, net exports, and government purchases, rose at a tepid 1.4% annual rate in the fourth quarter but was up at a 2.5% annualized rate in the past two years.  Today we also got our first look at economy-wide Q4 corporate profits, which grew 2.6% compared to the third quarter and are up 2.2% from a year ago.  Most of the gain in Q4 was due to profits at domestic non-financial companies; profits increased slightly at domestic financial firms but were down slightly from the rest of the world.  Our capitalized profits model suggests US equities remain cheap, not only at today's interest rates but even using a 10-year Treasury yield of 3.0%.  From a long-term perspective, the recent selloff in equities due to the coronavirus is a buying opportunity.  That said, the next few quarters are going to get ugly.  Currently we are forecasting  that real GDP will decline at a 1.5% annual rate in the first quarter and at a 20% rate in Q2, the steepest drop in output since the end of World War II.  However, we also expect a rebound in real GDP starting in the third quarter.  The market is forward-looking and will turn well before the economy bottoms.   

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