March 27, 2020

The final estimate of consumer sentiment for March came in at 89,1 compared to a preliminary estimate of 95.9,  Given that the original reading was based on survey responses received in the first half of the month, it implies that responses in the second half of the month were 62.5 which is probably the kind of reading we should expect for April.  Note from the chart above that a level in the low 60’s is in line with readings experienced in the depths of the 2008-09 recession.

Surveys of Consumers Chief Economist Richard Curtin said that this drop was comparable to the declines seen in the early days of the 2008-09 recession, and in the wake of Hurricane Katrina.  Some observers noted that the Katrina decline was reversed in three months and believed that a similar pattern should be expected in the months ahead.  Curtin noted that “The extent of additional declines in April will depend on the success in curtailing the spread of the virus and how quickly households receive funds to relieve their financial hardships”  He added that, “To avoid an extended recession, economic policies must quickly adapt to a new era that will reorder the spending and saving priorities of consumers as well as the relative roles of the public and private sectors in the U.S. economy.

Our sense is confidence will continue to decline for at least another month or two.  We will take a stab that it could dip to about 62.0 in April for the same reasons that it declined in March.  As Curtin noted, how sharply confidence drops and when it turns upward will be determined by how quickly the virus gets under control.  We are encouraged that in the epicenter of the crisis, China, the virus is now well under control. The virus became evident in China in late December.  China took draconian measures to corral the virus and it has worked.  It became clear that it was getting under control by mid-February when the number active cases peaked at 58,000.  This number is important because it measures the number of people that can transmit the virus.  People who have died or have gotten over the virus, cannot pass it to someone else.  From that mid-February peak of 58,000 the number of active cases has fallen to just 3,000 by the end of March..  Given that China-type draconian measures have now been adopted by the rest of the world, we are hopeful that we will see signs that the virus is getting under control in the rest of the world by mid-April.  Once that happens and stock market investors recognize that the worst is not going to happen, the stock market will regain its footing and consumer confidence will once again begin to rise.

Regarding the likely GDP growth rates for the first and second quarters, it is important to keep in mind that data for December through February were quite strong, so first quarter data might not be as weak as one might think.  We will take a stab at +1.0% growth in that quarter.  The real weakness will become apparent in the second quarter GDP data.  In late March three million workers lost their job in a single week.  Confidence in the second half of that month plunged.  As a result, we now anticipate a decline in Q2 GDP of 20.0%.   Beyond that the path of the economy will depend on the virus and whether it is showing signs of getting under control.  We expect that to happen by about the middle of April.  If so, the stock market might turn upwards and we will begin the path toward expansion and the economy will begin to recover in the second half of the year.  Following a 20% drop in the second quarter, we now look for GDP growth of perhaps 8.7% in the third quarter, and 7.0% growth in Q4.  That quarterly pattern would cause GDP  for the year to decline 1.0%.

The drop in consumer sentiment in March was attributable to both the present conditions and expectations components.

Consumer expectations for six months fell from 92.1 to 79.7 .

Consumers’ assessment of current conditions declined from 114.8 to 103.7.

Stephen Slifer

NumberNomics

Charleston, SC