With Reopening, US Economy Begins to Show Signs of Life
WASHINGTON—The economic recession caused by the COVID-19 pandemic lockdowns is finally starting to show signs of bottoming out. Many forecasters expect a strong bounce in economic activity over the second half of the year, while urging caution due to high uncertainty.
Economic data in March and April revealed the broad damage done by the crisis on the U.S. economy. Many forecasters expect the U.S. gross domestic product to contract by almost 40 percent in the second quarter, a rate not seen in the post-war era.
Most of the May and early June data are now showing growth from historic lows. The May employment report was a welcome surprise, as the economy added 2.5 million jobs versus the estimated 7.5 million job losses.
The labor market, however, isn’t the only area showing signs of recovery.
The U.S. manufacturing sector ended a four-month decline and made modest gains in May, according to the Institute for Supply Management (ISM) manufacturing survey.
Similarly, the service side of the economy began to recover, with the ISM’s non-manufacturing activity index rising to a reading of 45.4 last month from 41.8 in April.
Meanwhile, consumer sentiment recorded its second monthly gain in early June. The Michigan Consumer Sentiment Index rose to 78.9, beating market expectations.
And there have been some swings in the housing market.
“Pending home sales and housing starts fell last month; however, mortgage purchase applications continue to increase, supported by low interest rates,” Carl Tannenbaum, chief economist of Northern Trust Asset Management said in a report.
He expects the U.S. economy to grow by 16.7 percent in the third quarter and 11.8 percent in the fourth quarter this year.
After the sharp contraction in the second quarter, economists believe the contours of the economic recovery are coming into focus and will be more visible in the third-quarter data.
“A rapid reopening of the U.S. economy in May and the sharp drop in retail sales in March and April nearly ensures a sizable bounce in economic activity,” Scott Anderson, chief economist at Bank of the West, owned by BNP Paribas, stated in a report.
“Demand in some areas of consumer spending from housing, recreation vehicles, and boats have been stronger than expected. Reopening stats tracking Americans’ driving and walking movements, and restaurant reservations are bouncing back well,” he said.
Rebounding stock markets could also boost consumer spending in the coming months.
“We estimate that for every $1 increase in stock market wealth, consumer spending will rise by approximately 3 cents in less than a year,” Anderson said.
Consumers, who drive more than two-thirds of U.S. economic activity, are expected to become more optimistic if the stock market continues to rise and more states safely reopen their economies.
President Donald Trump vowed a “transition to greatness” in the second half of this year as states begin lifting lockdown measures.
“We’re really doing a financial comeback. The jobs numbers were fantastic,” he said on June 10 in a roundtable discussion at the White House.
“Now, we’ll have some other job numbers come up over the next few weeks, and we’ll see how that goes. But I think it’s really good, and we’re on our way to a very big comeback.”
Despite the unexpectedly positive May jobs report, the Federal Reserve’s policy meeting last week reaffirmed that the policymakers have a cautious view about the economic outlook.
The Fed held interest rates near zero at its Federal Open Market Committee (FOMC) meeting on June 10 and signaled that rate hikes are not a consideration over the next two years.
Fed Chairman Jerome Powell reinforced this message at the press conference after the FOMC meeting, noting that the committee is not “even thinking about thinking about raising rates.”
Powell said the labor market might have hit bottom, implying that the recovery in the jobs market may have started. But the central bank will not overreact to a single data point and will be very careful about reaching any conclusion, he said.
Powell also warned that many millions of people will not go back to work quickly because it will take some time for certain sectors of the economy to recover.
The layoffs continue even as states reopen economies. An additional 1.5 million Americans filed first-time jobless claims for the week ending June 6.
The number was below the consensus estimate, and it marked the tenth consecutive weekly decline. The total number of claims filed since mid-March is over 44 million. Continuing claims, which is the number of people who are still filing for weekly benefits, is now at 21 million.