More Economic Reports Point to a Bottom, but a Recovery Continues to Look Father Off

Economic Report Monitor #52

July 15th, 2020

A choppy day in trading ends with indexes higher about 0.5% to 1.0%. Nasdaq once again lagged the other major indexes as tech stocks look to slow from their fast pace. Treasury yields remain low despite hopes that Moderna's coronavirus vaccine would continue to show positive results. The dollar reaches towards YTD lows. Consolidation looks to be the trend as bad news continues to outweigh the good news, and the recovery pauses as investors look for a reason to buy. The latest Empire State Manufacturing Index for July 2020 suggested manufacturing activity has stabilized in NY.

The general business conditions index grew to 17.2 in July marking its first positive reading since February. While the index values have completed a V-shaped recovery, most categories point to just a stabilization. Despite the indexes jumping to near-term highs, only a net 17.4% and 15.2% reported seeing higher new orders and shipments. Unfilled orders were gridlocked at -0.6% with inventories now drawing (a net 9.7% reporting lower inventories). In more positive news, employment looks to have stabilized from its contraction. Both number of employees and average employee workweek categories were mostly unchanged with 55.7% and 64.8% reporting those categories "unchanged."

In the forward-looking portion of the survey, expectations fell for the first time during the COVID-19 pandemic. The general business conditions index fell -18.1 pts to 38.4. New orders and shipment expectations fell from all-time highs as businesses begin to anticipate continued restrictions due to a resurgence of cases in various states. Employment and spending responses remain low. A reversal in expectations suggests businesses are starting to accept lengthened economic disruptions as the pandemic remains.

Import and export prices increasing in June pointed to a recovery in trade as COVID-19 faded last month. Both grew 1.4% but saw help from a 21.9% resurgence in fuel imports. Demand for Chinese goods stabilized with imports up 0.1% but remain down -0.9% YoY. Export prices to China rose 1.9% in June to extend a 2.3% gain in May as a sharp recovery occurs there. However, export prices are still down -2.5% YoY. Air passenger fares saw a sharp gain in June as well, as import fares were up 7.0% and export fares were up 6.4%, but the YoY losses are still heavy. Overall, data points to a bottom in the contraction of trade with normal levels of pricing returning. However, if the US's fast case growth continues to deviate from the rest of the world's slow case growth, trade disruptions could reemerge.

Consistent with the pick up in the Empire State Survey, the Federal Reserve reported a rise in industrial production in June. The 5.3% increase was most prominent in final product industries where consumer goods and business equipment grew 9.0% and 11.8% respectively. Construction and materials industries lagged up 1.3% and 3.1%. The recovery in production in June was a step in the right direction, but capacity utilization is still well below COVID-19 levels at 68.6% (-8.3% below February's value of 76.9%). Historically, industrial production levels are still low, and they could remain depressed if businesses anticipate the resurgence to continue. With cash flow uncertain, businesses will keep capacity as low as possible to cut costs as much as possible.

The final report for the day, the Atlanta Fed Business Inflation Expectations Survey in July, had few optimistic messages. Inflation expectations for the year ahead were 1.7%, unchanged from June and still at the bottom of the range the series usually falls into. Sales and profits were recovery but remain at historically low levels, and cost growth expectations fell to 1.1% as many businesses anticipate the need to cut costs. Labor costs were a component expected to drop in the next year. Large firms reported the most optimism when it came to sales numbers as those respondents saw sales on average -7.6% below normal versus small and midsize firms at -14.9% and -13.5%. Despite the sour expectations, businesses did see better activity in July. A special question revealed that only 22% saw "severe disruption" to business operations and 32% saw "severe disruption to sales activity versus 38% and 54% three months ago.