INDICATOR: May Consumer Confidence and Philadelphia Fed Non-Manufacturing Index, April New Home Sales and National Activity
KEY DATA: Confidence: +0.9 point, Phil. Fed (NonMan.): +41.1 points/ Home Sales: +0.6%/ CFNAI: -11.8 points
IN A NUTSHELL: “The free fall started to stabilize in May, but the economy is in a really deep hole.”
WHAT IT MEANS: We expected April to be the cruelest economic data month and it was. In contrast, the May and June data should start to tell us the extent to which conditions have stabilized or maybe even turned. One critical measure is consumer confidence and in May, the Conference Board’s Index rose a touch, which was good to see. However, the current conditions index continued its decline, though that drop was modest. There was a slightly larger increase in expectations, which was expected given that the economy did start to reopen during the survey period. While it was nice to see that the overall confidence index is no longer collapsing, it was disturbing to see that the percent of respondents saying that business conditions were bad rose fairly solidly and is now over fifty percent.
The May Philadelphia Fed’s NonManufacturing Index rose sharply. But don’t look at that gain as being good. The level of the index was coming off of record lows and remains in deep recession mode. Also, this is a diffusion index, which does not measure levels, only relative changes. In April, manufacturing crashed and burned. In May, the conflagration continued.
The good news today was that new home sales actually increased. That was totally unexpected. Even though many states allowed construction to continue, it was expected that sales contracts would drop. Demand was up in three of the four regions with only the West reporting a decline. The other eye-opener in the report was the 8.6% drop in prices. It is hard to really know whether this represents builders having “fire” sales (pardon the pun) or just a shift toward lower priced homes, but the decline was quite large.
The Chicago Fed’s National Activity Index plunged in April. This is a very broad measure as it includes eighty-five indicators and it signaled that the downturn was spread across the entire economy. That should not surprise anyone, but it will take a lot just to get us back to expansion mode from deep recession mode.
IMPLICATIONS: It was good to see that consumer confidence has stabilized. Given that every state is now starting to reopen, the outlook for the future should improve solidly in the months to come. At least for the next few months, it is the measures of current conditions that may matter more. If they start improving significantly, it would be a sign that households are ready to spend money. Modest improvements, though, would be warnings that consumption may not surge and that would mean a more tepid recovery. Meanwhile, investors are more focused on vaccine issues than the economic data. Anytime hopes for a vaccine being found by year’s end rise, the markets soar. But as I have noted, it could take up to two years to get back to where we were at the end of 2020. That should factor into earnings potential, since one assumes that the level of activity has something to do with the level of potential earnings. Yet the S&P is back to late October 2019 levels, when investors were factoring in decent growth this year. (It is also back to early March, but that was when the markets were collapsing.) So, does earnings growth or do earnings levels matter? Ask investors. I’m just an economist who teaches corporate finance and theory and practice don’t seem to be in synch to me. Also, part of today’s rally is likely due to Dr. Fauci saying last week: “I think it is conceivable, if we don’t run into things that are, as they say, unanticipated setbacks, that we could have a vaccine that we could be beginning to deploy at the end of this calendar year, December 2020, or into January, 2021”. Man, he sounds just like an economist, hedging his forecast in every way possible. Let’s hope he is close to being right.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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