INSIGHTS BLOG

ECONOMIC INDICATORS SET TO BECOME SYMPTOMATIC

Mark Lister, 30 March 2020

The impact of COVID-19 and the fight to slow down its spread is clear when you look at financial markets or consider how our daily lives have changed in recent weeks.

However, we haven’t yet seen the virus make its full presence felt in the economic indicators that many of us watch closely. That’s all about to change, as we start to see evidence of just how significant the disruption has been on parts of the global economy.

Anyone still underestimating the magnitude of what we are facing would've got a major reality check if they took notice of weekly US jobless claims last Thursday. This figure essentially represents the number of Americans filing for unemployment benefits, which the US Labor Department started reporting on a weekly basis back in 1967.

A mere fortnight ago, weekly jobless claims were 211,000, close to a 50-year low. But last week there was an unprecedented surge in claims, with 3.3 million people seeking jobless benefits. To put this in perspective, previous highs included 695,000 in 1982 and 665,000 in 2009 (during the two worst US recessions since World War II).


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Sadly, there’s more of this to come, and investors should brace themselves for a raft of poor headlines spread across the business pages over the next month or two.

There are two major economic releases in the US this week. The first is the ISM manufacturing index for March, which is expected to fall sharply, while the second is the monthly US jobs report. The latter will likely show the first decline in US payroll numbers in a decade, with the unemployment rate expected to rise from the half-century low of 3.5 per cent that prevailed only a month ago.

We should expect these numbers to get much worse over the next little while. The March US unemployment rate won't yet reflect the full extent of the shutdowns and layoffs, given the period it covers was just before the bulk of these took place.

It'll be a similar story here in New Zealand when statistical agencies start to report on things like unemployment, GDP growth and trade data. House prices and sales volumes won’t be immune either.

We'll get a taste of the bad news this week, when we see the latest ANZ Business Outlook survey. ANZ released some preliminary results a couple of weeks ago, and the early release wasn’t encouraging for how the business sector is faring.

Headline confidence fell back to the 11-year low that prevailed through the middle of last year, while employment and investment intentions also declined. Firms’ expected own activity was the lowest since March 2009, while a net 22 per cent per cent said they were expecting lower exports (the lowest reading ever). The full report for March is likely to look weaker again, while next month's confidence readings will be worse still.

Believe it or not, there are a couple of positives investors can take out of all this. The first and most obvious is that none of this will be a surprise to anyone, so a fair chunk of the bad news is almost certainly already factored into expectations, as well as share prices.

Everyone knows the world’s major economies are facing a recession, that unemployment is headed higher and that corporate earnings is set to fall off a cliff this year. That’s why most sharemarkets are down 20 to 30 per cent, give or take.

The only question is whether the market reaction appropriately matches the slowdown that is ahead (and the offsetting avalanche of stimulus which will soften the blow).

For example, the day those terrible jobless claims numbers were released last week, US shares actually closed higher. The news couldn't have been worse, but it was expected to be so, which meant the reaction was minimal.

One bright spot this week could be some fresh data out of China, with two separate activity surveys due. These will cover both the manufacturing and services sectors, and they will be the first real evidence of how March has been tracking in the world’s second largest economy.

The numbers will still look mediocre compared to what we’d consider ‘business as usual’, but they should at least bounce strongly from February levels, with anecdotal reports suggesting things are steadily returning to normal in China.

Nike, for example, said last week that during the peak of the outbreak in February three quarters of its stores in China were closed, while others were open on reduced hours.

However, as of last week almost 80 per cent of those stores were open. Nike also noted that digital sales in China were approaching triple-digit growth, so many people are still shopping, just in a different way.

Most global sharemarkets rebounded strongly last week, with the S&P 500 in the US rallying more than 10.3 per cent, the best weekly performance since March 2009.

Part of that was probably a reaction to how heavily shares had been sold off previously, and it was also likely due to a plethora of positive announcements from central banks and governments worldwide about support packages and stimulus efforts.

Much of those good things are behind us for the time being (although I wouldn't rule out more of this, should it be required), which means investors might be left to focus on some of the more negative headlines. With economic releases set to get quite a bit worse during the next month, we should expect the bumpy ride to continue over the short-term.

Looking further ahead, it might come down to just how accurately forward-looking financial markets have already priced in all this bad news.