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US Economy Expected to Suffer Heavy Blow from Coronavirus Crisis

The US economy is on track to suffer a heavy blow from the coronavirus crisis in the second quarter, according to several GDP nowcasts compiled by CapitalSpectator.com.

 

By james Picerno

A hint of the macro loss was previewed in the Q1 data, which reflected 4.8% decline. But new estimates for Q2 point to a far bigger contraction unfolding in this quarter.

The median Q2 nowcast is an extraordinarily steep 31.6% decline. A loss of that magnitude would be the biggest quarterly decline by far in the post-World War Two era.

“The fate of the economy in Q2 and beyond is at the whim of the virus,” advise economists at JP Morgan. “While the removal of restrictions is important to re-start activity, any economic recovery also will depend on how willing people are to participate in economic activity and also how these reopenings affect the virus spread.”

The self-imposed shutdown of economic activity will, in theory, bounce back once the Covid-19 risk fades. There are tentative signs that the worst has passed, at least for now. For example, the daily change in US coronavirus-related fatalities appears to have peaked, although the decline in new deaths is falling slowly.

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New data for China released today provides a test of how quickly an economy can rebound after suffering a Covid-19 lockdown. As Bloomberg notes, however, “China has a lesson for the world: An economy is harder to reboot than it is to shut down.”

Fresh data for the month of April, covering a period when the government pushed hard to reopen the economy as the coronavirus came under control, show that retail sales(NYSEARCA:XLY) continue to fall as consumers shun restaurants and curb spending on other non-essential items.

While factory(NYSEARCA:XLI) output rose for the first time since the virus struck and state investment improved, private investment remained anemic. Worryingly for manufacturers who are already battling deflation and a slump in global demand, inventories are stacking up as supply outstrips demand.

For the US outlook, Torsten Slok, the chief economist of Deutsche Bank Securities, used restaurant bookings in states that have reopened as a rough estimate of how the US may rebound. The main takeaway: the recovery will take much longer compared with the rapid pace of the shutdown and economic loss, as he summarized in the chart below:

Meanwhile, the incoming numbers are expected to confirm that Q2 will be ugly. Today’s retail sales report for April, for instance, is projected to show a record decline – a massive 12% crash, according to economists surveyed by Dow Jones.