US ISM Non-Manufacturing PMI Preview: Will April’s statistics reignite the safety trade?

• Purchasing managers’ index forecast to fall below 2008 recession level to all-time low.
• Severe contraction prompted by collapse in consumption after historic job losses.
• Service PMI may provide warning of much deeper economic losses.
• April figures on sales and payrolls could reignite the safety trade.

The economic toll from the shutdown of large parts of American commercial and social life is set to escalate to conditions not seen since the Depression.

The non-manufacturing purchasing managers’ index is expected to fall to 32 in April a record low for this 23 year old survey. If accurate the drop from 52.5 in March would be the largest one month fall in the history of the series.  The crucial employment and new orders indexes are also set to plumb new depths.

Much of the nation’s service sector remains closed on government orders as part of the effort to halt the coronavirus pandemic.  Some states have started to lift restrictions on business and social gatherings but it is uncertain how quickly commercial activity will be able to resume or how many jobs will be recovered

Shutdown consumer accounting

The leading edge of the economic catastrophe from the mandated business closures has been the weekly jobless claims filings which reached 30.307 million on April 30 a mere six weeks after registering 282,000.   

These lost jobs and their missing income, many are low paid hourly workers, have forced millions of households to drastically curtail spending as they have little income but their unemployment checks.

Retail sales plunged 8.7% in March, the largest decrease on record and more than twice the previous low of -3.8% of October 2008.

Durable goods orders plummeted 14.4% on the month, the second largest amount in its history. Both the sales and good series began in 1992.

Personal spending collapsed 7.5% in March, more than three times the next largest monthly decline of 2.1% in January 1987, according to the Bureau of Economic Analysis, in a series that goes back to 1959.  Personal income decreased 2% in March down from 0.6% in February.

Reuters

Real personal spending, which is adjusted for inflation, fell 7.3%, the most in its 18 year history by a factor of 8.1. The largest previous monthly decreases were 0.9% in September 2009 and December 2018. 

April’s figures on consumer spending and consumption in general are expected to be considerably worse as jobs losses have continued and involve the entire month.

US GDP

Consumption accounts for about two-thirds of US GDP and the wholesale job destruction and attendant collapse in consumer spending is having a drastic impact on economic activity.  

First quarter GDP contracted 4.8% and the Atlanta Fed’s GDPNow estimate for the second quarter is -16.1% down from -12.1% on April 30.  That rate is expected to decline further as more data for April becomes available.

To give a sense of the magnitude of this debacle, since the Second World War the three worst quarterly declines in annualized GDP were -9.98% in the first quarter of 1958, -8.38 in the fourth quarter of 2008 and -7.99% in the second quarter of 1980.

ISM Survey

The ISM Survey reflects the business conditions in the month of the survey.

“Respondents are asked to ONLY report on information for the current month. ISM^® receives survey responses throughout most of any given month, with the majority of respondents generally waiting until late in the month to submit responses in order to give the most accurate picture of current business activity,” according to the ISM website.

The retail sales, durable goods and personal spending figures for March cited above will undoubtedly be worse in April. But though those sales statistics are not yet available, the PMI survey gives in index form the business conditions generated by the month’s consumption.  

Implications: Equities, credit and the dollar

Thus far the hard facts on the economic catastrophe created by the government attempts to control the coronavirus have been the initial jobless claims figures for the last six weeks. April figures on retail sales, durable goods and personal spending will not be released until May 15, May 28 and May 29.

Non-farm-payrolls will be out on May 8 and the almost unbelievable forecast is a 21 million drop in employment and a 16% jobless rate.

Market perceptions of the depth of the economic damage have been largely based on the claims figures.

The April ISM Surveys, manufacturing last week at 41.5 in the headline and much weaker numbers for new orders 27.1 and employment 27.5 and the forecast for services at 32 with their correlation to economic output put the cost in consumption and GDP in much starker terms.

Equity and credit markets have been supported by the liquidity provisions of the Federal Reserve and federal government which have poured trillions of dollars into the US economy.

Stocks are also banking on a relatively rapid, if incomplete, return to normal economic activity.

The dollar’s risk premium has slowly eroded as the coronavirus pandemic has habituated as a market threat and there have been no economic surprises.  This past week’s trading left the dollar lower week against the euro, yen, sterling, aussie and Canadian dollar, though only marginally against aussie and loonie.

The next set of US figures on consumption, payrolls and unemployment may be outrageous enough to shock markets back to risk aversion and the dollar.  If so services ISM will provide the warning.