March 31, 2020
The Conference Board reported that consumer confidence for March fell 12.6 points to 120.0 after having risen 2.2 points in February. Confidence plunged in March as the corona virus continued to spread and as policy makers introduced drastic measures to halt the spread of the virus. Those shelter-in-place measures have stopped the economy dead in its tracks. For example, 3 million people lost their jobs last week alone. That was almost five times the previous record high level for a single week.
Lynn Franco, Director of Economic Indicators at the Conference Board said,“The intensification of COVID-19 and extreme volatility in the financial markets have increased uncertainty about the outlook for the economy and jobs. March’s decline in confidence is more in line with a severe contraction – rather than a temporary shock – and further declines are sure to follow.”
For what it is worth, using the China experience with what happens once super restrictive measures are taken to stop the spread of the virus, we saw early signs that the virus was beginning to get in check by mid-February, 2-3 weeks after those measures were put into place. By late February it was clear that the virus was on the downswing. For example, the number of “active” cases in China, which is a measure of the number of people who can spread the virus fell from 58,000 on February 17 to 2,100 as of this morning. Thus, the Chinese economy took a very severe hit to the economy for a short while, but the virus has been stopped dead in its tracks. We expect something similar to happen here. Drastic action was taken in mid-March. We expect to see early signs of improvement by early April and more clear-cut evidence that the virus is slowing down by the end of April. Once it is clear that the virus is on the downswing, the stock market should rally vigorously. Consumer and business confidence will return. Given all this we look for Q2 GDP to decline 20.0%, but for Q3 and Q4 GDP to climb by 8.7% and 7.9% respectively. You have to remember that we have checks going out in the next couple of weeks to every taxpayer. The total of that will be about $250 billion. It is designed to replace wages lost as the result of layoffs or shortened hours. That does not include the money extended to small businesses to keep them afloat. Add it all up, and it be one of the sharpest GDP decline ever, followed by a surprisingly vigorous rebound. We will see.
Confidence data reported by the Conference Board are roughly matched by the University of Michigan’s series on consumer sentiment. As shown in the chart below, trends in the two series are identical but there can be month-to-month deviations. Both series experience very sharp declines in March, but because the surveys were taken earlier in the month, further sharp drops are almost certainly in store for April.