This Week In The Economy: Will The US Recovery Be Erased By COVID Spike, Fed Warns of ‘Considerable Risks’ Ahead, Consumer Confidence Wavering
By: Brai Odion-Esene
Tags: Federal Reserve, Macroeconomics, Covid 19 Crisis, Coronavirus Update, Monetary Policy

This Week In The Economy: Will The US Recovery Be Erased By COVID Spike, Fed Warns of ‘Considerable Risks’ Ahead, Consumer Confidence Wavering

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

Approaching 20 Million COVID-19 Cases Globally, U.S. Fatalities Cross 150,000

The are now over 17 million confirmed COVID-19 cases around the world, as cases surge in many countries — with 17,321,394 confirmed cases. Of that number, 6,492,546 are active and there have been 673,822 deaths. The United States continues to see its number of coronavirus cases rise, and now has 4,578,113 confirmed cases — with 2,182,403 active and 154,251 fatalities.

So far this week (from July 26–July 30), there have been 303,775 new COVID-19 cases in the United States, compared to 322,079 during the same five-day period last week. On July 30 alone, there were 68,543 new instances of coronavirus infections, in week when former U.S. presidental candidate Herman Caine died of COVID-19, and Texas Rep. Louie Gohmert, a vocal critic of mask-wearing mandates, tested positive for coronavirus.

Brazil is still in second place, with the number of confirmed cases jumping to 2,614,662 at time of writing — 699,151 active and 91,416 deaths.

India remains in third with 1,669,264 confirmed cases, 557,747 active and 36,076 fatalities. Russia has 839,981 confirmed cases, 187,608 active and 13,963 deaths.

South Africa is fifth on the list, with Africa’s largest economy dealing with 482,169 confirmed cases — 164,756 active, and 7,812 fatalities.

Besides Brazil, other Latin America countries continue to see rising numbers. Mexico jumped up to sixth place with 416,179 cases — 97,992 confirmed and 46,000 deaths. Peru is next with 407,492 confirmed, 104,556 of them are active and 19,021 fatalities. Chile has 353,536 confirmed — 17,531 active, 9,377 deaths.

Depth of U.S. Recession Confirmed — Will Surge In Outbreaks Prevent A Recovery?

U.S. economic activity declined by a whopping 32.9% in the second quarter, the worst on record, according to the Bureau of Economic Analysis. Lockdown measures to contain the spread of the coronavirus, as well as government aid to impacted businesses and workers, were in place for the majority of this period. U.S. real GDP declined by 5% in Q1.

The decrease in real GDP reflected drops in consumer spending, exports, private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending (which was partly offset by more federal government spending). Imports also declined.

The report showed a decrease in consumer spending on both services (led by health care) and goods (led by clothing and footwear).

As discussed numerous times in this column, personal consumption is a major driver of U.S. economic growth, and the high level of uncertainty sparked by the pandemic — more on that later — makes it hard to predict if activity will rebound strongly in Q3 or remain weak.

Consumers continue to hoard even more of their cash for a potential rainy day, rather than spend. Personal saving was $4.69 trillion in the second quarter, compared with $1.59 trillion in the first quarter. The personal saving rate — personal saving as a percentage of disposable personal income — was 25.7% in the second quarter, compared with 9.5% in the first quarter.

The worrying employment situation is another factor keeping consumers at home. As COVID cases around the country rise, many states and localities are reimposing some lockdown measures on businesses, sparking a flood of layoffs.

The Labor Department reported that last week, 1.434 million Americans filed first-time claims for unemployment insurance, an increase of 12,000 from the previous week’s level — which was revised up by 6,000 from 1.416 million to 1.422 million. The number of unemployed who continue to receive benefits was at roughly 17 million for the week of July 18, an increase of 867,000 from the previous week’s level.

As of the July 11 week, there were 30.2 million Americans receiving some form of unemployment insurance compared to 1.7 million during the same period a year ago.

In an early sign of what Q3 might look like, separate data from the Bureau of Economic Analysis released this week showed personal income in the U.S. decreased 1.1% in June from May. Disposable personal income decreased 1.4%, but personal consumption expenditures (consumer spending) increased 5.6% on reopenings.

But with July COVID spikes, we could be set for a sharp reversal in the consumer spending trend, while income declines even more.

Federal Reserve Leaves Low Interest Rates In Place, Warns of ‘Considerable Risks’ Ahead

The Federal Reserve’s Federal Open Market Committee left interest rates unchanged following its meeting this week, and vowed to continue deploying all the tools at its disposal to keep the economy afloat.

The central bank noted the “tremendous human and economic hardship,” caused by the pandemic, and said the recent uptick in activity following partial reopenings still significantly lags where we were in January.

Looking ahead, “The path of the economy will depend significantly on the course of the virus,” the Fed said, warning that “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

“It will take a while to get back to the levels of economic activity and employment that prevailed at the beginning of this year, and it will take continued support from both monetary and fiscal policy to achieve that.” — Jerome Powell

Speaking to reporters after the meeting, Fed Chair Jerome Powell stressed the uncertain nature of the outlook, and said a full recovery is unlikely until Americans are confident that it is safe to reengage in a broad range of activities. He pointed to jump in COVID-19 cases since mid-June, describing it as a “new phase in containing the virus, which is essential to protect both our health and our economy.”

“Indeed, we have seen some signs in recent weeks that the increase in virus cases and the renewed measures to control it are starting to weigh on economic activity,” Powell said.

The Fed chief also called on Congress to do more, arguing that the central bank has “lending powers, not spending powers.” While it can create programs to make loans to businesses, “for many others, getting a loan that may be difficult to repay may not be the answer,” he said.

A better option wold be direct fiscal support, with Powell noting that lawmakers have the power to tax and spend and to make decisions about where resources whould be directed — such as the Paycheck Protection Program, pandemic-related unemployent assistance etc.

Even as the number of unemployed remains significantly elevated and rising, the Federal Pandemic Unemployment Compensation program, which provides an additional $600 per week to individuals who are collecting regular unemployment benefits, expires this week with lawmakers and the White House unable to reach a deal to extend the program.

The BEA in its June Personal Income report noted the decrease in personal income last month “was more than accounted for by a decrease in government social benefits to persons as payments made to individuals from federal economic recovery programs in response to the COVID-19 pandemic continued, but at a lower level than in May.”

U.S. Consumer Confidence Takes A Step Back In July

The rebound in consumer optimism over the past two months following the easing of lockdown measures — as well the uptick in spending that accompanied it — might be short-lived as the number of COVID-19 cases spike once more around the country.

The Conference Board reported this week that its ‘Consumer Confidence Index’ declined in July, dragged down primarily by a more pessimistic view of future conditions.

The Present Situation Index — based on consumers’ assessment of current business and labor market conditions — rose from 86.7 to 94.2. However, the Expectations Index — based on consumers’ short-term outlook for income, business, and labor market conditions — fell from 106.1 in June to 91.5 this month.

“Large declines were experienced in Michigan, Florida, Texas and California, no doubt a result of the resurgence of COVID-19,” the Conference Board said. “Looking ahead, consumers have grown less optimistic about the short-term outlook for the economy and labor market and remain subdued about their financial prospects. Such uncertainty about the short-term future does not bode well for the recovery, nor for consumer spending.”

Germany Reports Largest Q2 GDP Contraction In 50 Years

Data from Germany this week also showed the full extent of lockdown measures on Europe’s largest economy, with real GDP falling by 10.1% in Q2 — the biggest drop since 1970.