Mixed Economic Reports Leaves Sentiment Unclear

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Economic Report Monitor #33
May 27th, 2020

Stocks jump again on Wednesday as another busy day of economic reports brings along more information about the economic effects of the COVID-19 outbreak. Meanwhile, central banks continue their fight against those economic effects as the European Central Bank (ECB) announces a new stimulus package worth as much as 750 billion euros ($825 billion). The bank's president, Christine Lagarde, also announced today that they expect output to drop 8-12% in the Euro-area in 2020. The sentiment seems to disagree with the momentum seen in stocks recently as the financial situation screams for a reality check.

MBA Mortgage Applications this week reflected the surprising new home sales number from yesterday. The Purchasing Index jumped 9.0%, building on a 6.0% gain the week before, to carry the Composite Index up 2.7%. The Refinancing Index stayed flat at -0.2% as no major move in interest rates inspired a shift in mortgage refinancing. So far, real estate data has shown that COVID-19 might only have a moderate effect on that market.

The Richmond Fed Manufacturing Survey follows the Dallas Fed survey and delivers a similar tone. Business activity in May was soft but saw a large increase from the bottoms in April. Shipments jumped from -70 to -26, new orders from -61 to -35, and local business conditions from -87 to -42. Expectations for these indicators also improved with all three ending positive in May. However, business spending improvement was muted as capital expenditures fell from -21 to -32, service expenditures stayed flat from -30 to -28, and equipment & software spending saw only a soft increase from -22 to -17. 

The main difference between the Richmond survey and the Dallas survey was in the employment indicators. While Dallas saw a decent recovery, Richmond saw number of employees only increase from -21 to -16 and average workweek from -28 to -24. This difference is probably attributed to the Dallas Fed region experiencing more of a downturn in cash flow as COVID-19 effects were compounded with low oil prices effects. With the rebound in oil prices, the Dallas firms likely reported improvements stemming from the positive effects there. The Richmond survey might be a better proxy for trends in the national manufacturing sector with less sensitivity to energy commodity prices.



The final report of the day contradicted the slightly optimistic MBA Mortgage Applications report and the Richmond Fed manufacturing survey. The Survey of Business Uncertainty saw expectations worsen in May. In particular, the expectations for sales growth saw another steep drop from -0.2% to -36.8% as firms in this report continue to see restricted cash flow over the next four quarters. The expectation of restricted cash flow lead them to forecast lower capital investment and employment growth, though those measures didn't fall as much (103.2% to 93.9% and 84.4% to 82.4%). Overall, the Business Uncertainty Index continued to skyrocket, jumping from 223.4 to 284.4. Based on these numbers, the next 12 months will be difficult for the average US business and an economic recovery may be delayed.


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