While success in suppressing new infections here has prompted talk of lifting economically crippling lockdown restrictions sooner rather than later, it’s now clear that the US economy is being smashed, in a way that will slow the entire global economy for some time to come.
Successive weeks of astonishing levels of unemployment claims has illustrated how the US jobs market has collapsed under the weight of lockdown and tens of thousands of deaths.
Now further data overnight has revealed the cost of the pandemic: a record 8.7% slump in retail sales across the US in March (that’s worth US$46 billion) and a 5.4% slide in industrial production — the biggest fall since 1946, when the US was winding down wartime production.
The retail collapse was led by a 27% sales slump at auto dealers and 17% at service stations and fuel outlets, two of biggest segments of the US retailing. Sales fell a smaller but still nasty 3.1% outside those two categories. Individual sub-sectors saw horrific falls: a staggering 50% at clothing stores, 26.5% at restaurants and 20% at department stores.
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That explains why iconic but already troubled major retailers are now facing collapse. JCPenney is missing debt payments and contemplating bankruptcy; Macy’s, the country’s largest department store group, is struggling to remain afloat and has stopped paying suppliers.
As in Australia, supermarkets and pharmacies saw rises in sales on panic buying surges, and internet-based companies such as Amazon did well.
Amazon shares hit a record this week on Wall Street, and Donald Trump, who has spent much of his presidency vilifying Jeff Bezos, is now phoning him to ask for help in reopening the US economy. Shares in Netflix, the streaming video giant, are also performing strongly.
As retail goes, so goes the US: consumer spending accounts for more than two-thirds of American economic activity. Spending rose at an annual 1.8% pace in the fourth quarter of 2019, compared to the overall economy expanding at a 2.1% rate.
US economists’ estimates for the current June quarter put the annual rate of fall in retail sales as high as 41%, pointing the way to a truly frightening contraction underway.
The Federal Reserve said on Wednesday in its April “Beige Book” report of anecdotal information on business activity collected nationwide (ahead of the next policy meeting of the central bank) that “economic activity contracted sharply and abruptly across all regions in the United States as a result of the COVID-19 pandemic”.
Another fed survey showed manufacturing activity in New York state, the hardest hit region, plunged in April to its lowest level in the series’ history. New York state by itself accounts for around 8% of all US economic activity.
All that’s despite an historic US$2.3 trillion fiscal package, which made provisions for cash payments to some families and boosted unemployment benefit payments.
Economists say the April retail sales and industrial production figures will be worse than those for March because the lockdown and other control measures for the COVID-19 pandemic didn’t kick in until the last half of March.
Meanwhile US banking giants such as Bank of America and Citigroup, JPMorgan Chase, Wells Fargo and several smaller lenders have put aside US$25 billion in extra reserves to handle an expected surge in bad debts in housing, businesses or all sizes and credit cards. JPMorgan, the biggest and arguably the best-run global bank, this week added US$6.8 billion to its loan loss reserves, helping send earnings down 69% for the quarter. Wells Fargo added US$3.1 billion to its reserves.
The caution of the major banks, and the explicit commitment of the Federal Reserve to do whatever it takes to support the financial system means that what might have been a systemically disruptive level of default will be accommodated without inflicting major damage on credit markets of the kind we saw in 2008.
But it indicates the level of carnage banks are expecting to come at them in the current quarter and, likely, for the rest of the year.
We’re still waiting to see what Australia’s banks are setting aside — though remember that the government’s JobKeeper program will keep many businesses going that would otherwise shut. Westpac this week warned its March 31 half year profit wold take a hit, mostly from the costs associated its money laundering breaches.
There are no numbers for costs from the pandemic yet, but Westpac has promised to make that public before its May 4 profit release date. It warned the figure would be “substantial”. We can expect NAB and ANZ to follow suit in coming days.
Today’s March jobless data has provided us with the state of the jobs market on the eve of the lockdown. Unemployment rose just 0.1% points to 5.2% seasonally adjusted, according to the Australian Bureau of Statistics. But it’s still a snapshot from a world before the virus.
“The trend and seasonally adjusted estimates for March have not been impacted as a result of COVID-19,” the ABS said, “primarily due to the reference weeks falling in the first half of March.”
In fact, the statisticians expect the pandemic impact to be so large and so volatile that it is going to change its methodology to accommodate large scale changes in employment right across the month being surveyed, and it may even ditch its trend series until a new “trend” for the pandemic and its aftermath is clear. It’s a small map market for the new economic world we’re entering.