Market Drops on More Tepid Economic Data

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Economic Report Monitor #54
July 23rd, 2020

As the pandemic continues to add new cases to the overall count, the market continues to struggle with an economic condition that is not improving. In another day of selling off, major indexes fell -1 to -2% with the Nasdaq leading the drop at -2.29%. Safe havens like gold and silver flourish as optimism stales and valuations continue to be tough to justify. The jobless claims reports today is just one example of that as initial claims increase for the first time since it seemed to have peaked in April. At 1.416 million, an additional 109,000 claims were added last week as the number of individuals beginning the unemployment process remains above 1 million for another week. Continuing claims did drop though as the insured unemployment rate fell to 11.1% and 1.107 million individuals stop receiving unemployment insurance. States where COVID-19 cases are resurging, Florida, Georgia, and California, are the main culprits for the increase in claims as those areas grapple with instituting another lockdown.

The Conference Board Leading Economic Index signalled some hope of a rebound in June as the index grew 2.0% after a 3.2% increase in May. The growth in those two months points to reopening processes slowly bringing back economic growth but not necessarily in the strongest manner. The stock market is factored in as a leading indicator, so the strong rebound seen in equities has made significant positive contributions to the index. However, there are concerns that stocks are overvalued in the current economic environment meaning the index may have rebounded stronger than it should have. The LEI in July may disappoint as the stock market hasn't performed as well this month and the index won't be pulled significantly by it.

The Kansas City Manufacturing Survey produced a mostly tepid report at 3 in July, slightly higher than 1 in June. Most indicators were flat with the main demand indicators at single digits: production at 2, volume of shipments at 4, and volume of new orders at 6. Responses were split pretty evenly between "increase", "no change", and "decrease" indicating a volatile economic landscape across businesses. Employment measures were single digits as well but mostly flat with number of employees and average employee workweek seeing "no change" response rates at 54% and 61%. Inventories are in decline as demand kicks up as materials inventories was at -5 and finished goods inventories was at -12. Expectations were better with the main demand indicators in high 10's and low 20's. Capital expenditure expectations are split but leaning contractionary with 73% indicating they expect to spend no more or less in 6 months.


In a special question, manufacturers were asked if their demand for office space has changed due to the COVID-19 pandemic. Respondents indicated that for the most part, that it has not changed. About 70% of respondents said that there was no change in the need for "office space or physical infrastructure" in the last 6 months or in the plans for the next 1-2 year. The rest of the answers were split evenly between increase and decrease. The answers to this special question suggest that the COVID-19 outbreak hasn't impacted physical infrastructure as some might have initially expected. Of course, businesses in the manufacturing sector might not have the option to go completely virtual, so this trend isn't altogether surprising.

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