Head of Macroeconomic Research
Summary: This afternoon, we had another confirmation that the coronavirus is causing unprecedented damage to the U.S. economy. It is hitting severely domestic confidence on the top of those supply chain impacts. The Conference Board consumer confidence index, which is one of the key metrics to follow, is out at 86.9 in April versus 87.9 expected and prior 120. This is the biggest drop on record since 1968.
The present situation index declined by 90.3pts to 76.4 – a monthly slump that has never been seen in previous recessions - and the expectations index surprisingly increased by 7pts to 96.7 – remaining within its long-term range (chart 1). This unexpected rise may be explained by the fact consumers consider that the situation can only get better after being really, really bad.
Somehow, they are more optimistic about the short-term business outlook but they send mixed signals which tends to confirm that uncertainty about the economic outlook continues to weight a lot on consumption expectations. Whereas the percentage of consumers expecting business conditions will improve over the next six months jumped by 21.3pts to 40%, those considering that business conditions will worsen also increased by 9.3pts to 25.7%.
Looking at labor markets, without much surprise, consumers’ perceptions eroded quite a lot compared to the previous month. Only 43.3% of respondents consider that jobs are “plentiful” versus 20% in March. 13.8% of respondents also signal that jobs are’ hard to get” versus 33.6% previously. It is bright clear that the deterioration of the labor market in the coming months will be quite phenomenal, and it suggests that the NFP report for the month of April due this Friday will be very ugly. We expect job destruction will reach at least minus 19 million.
In addition, the share of consumers expecting income to decrease over the next six months skyrocketed to 18.5% in April versus 10.1% in March. It is back to level reached in early 2013 (chart 2). Consumers also slightly downgraded their buying intentions for major appliances and quite sharply for autos. Consumers planning to buy autos within the next six months dropped to its lowest level since 2010, at 2.8% versus 3.8% in the previous month. We anticipate a rebound as soon as the lockdown will be lifted and that there will be more visibility about the economic outlook.
Finally, what is probably the most interesting and underappreciated element is the strong decline in vacation intentions (chart 3). Within the next six months, vacation intentions within the U.S. felt to all-time low at 27.1% and vacation intentions to a foreign country are below those of the GFC at 6.8%. It reinforces our view that the long-term impact of the outbreak on tourism will be massive and as devastating as the impact of a meteorite. It is largely unlikely that the tourist sector will get back to normal this year, given the risk of second or even third wave. The loss caused to the sector will probably take years to be repaired.
The evolution of consumption will be a critical factor once the health crisis will be over. The speed of the recovery will be dependent on sentiment, notably the evolution of consumption. In the United States, it remains the predominant driver of economic growth, accounting for 70% of GDP. It is probably too early to know how the consumers will behave in the coming months. Are we heading towards revenge consumption or an increase in saving? What we know for sure is that a prolonged deterioration in key metrics, such as unemployment and wages, would signal trouble for consumer consumption and could seriously slowdown the recovery.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
