How is the U.S. economy doing? Here are 7 key signs to watch during coronavirus crisis

12 min read

There’s only one color the U.S. economy is flashing right now: Recession red.

The coronavirus pandemic choked the longest economic expansion on record, with states’ stay-at-home orders putting the U.S. economy into a self-induced coma. As restaurants, bars, retailers, gyms and theaters closed to keep as many people home as possible, tens of millions lost their jobs, and unemployment surged to the highest levels since the Great Depression.

It’s a glimpse into how contagious recessions can be — perhaps just as much as the coronavirus that caused it.

“It’s a domino effect: The longer this goes on, the cracks get a bit bigger,” says Samantha Azzarello, global market strategist at J.P. Morgan Asset Management. “The policy response to COVID-19 is what caused the actual recession. It was a policy choice to shut down the economy. We’re getting hit all at once now.”

Here’s what’s happening in the U.S. economy right now — and how the coronavirus crisis is making or breaking it, based on these important measures.

1. Unemployment is back to Depression-era levels

The U.S. labor market was once a source of steadiness for individuals trying to spot check the health of the U.S. economy. Employers added a total of 21.5 million jobs throughout the previous expansion from June 2009 to February 2020, a record 113 months of growth.

But it’s now become what nightmares are made of, with a decade’s worth of gains seemingly erased in just two months’ time.

“If we thought the worst we’d ever see with economic data would be during the financial crisis and Great Recession, the virus proved us wrong,” says Mark Hamrick, Bankrate’s senior economic analyst.

Employers cut 881,000 positions from their payrolls in March, and another 20.5 million positions in April, according to the Department of Labor’s jobs report. That’s a gigantic and swift plunge, and by far dwarfs the total number of jobs lost during the Great Recession: 7.4 million.

After holding at half-century lows since 2018, the unemployment rate also skyrocketed to levels not seen since the Great Depression. Joblessness rose to 14.7 percent in April, the largest month-to-month increase on record. Unemployment is also likely 5 percentage points higher, based on the way the Bureau of Labor Statistics calculates joblessness, officials wrote in a complementary document with the report.

Losses were broad-based, with significant cuts coming in the retail and hospitality sectors, as well as health care and state and local governments.

Record number of Americans filing for unemployment benefits

But the Labor Department also releases another weekly labor market indicator: Jobless claims. The picture it’s painting is equally as heartbreaking.

More than 38.9 million Americans have applied for unemployment benefits over the past 10 weeks, which is about 1 in 5 U.S. workers. New weekly claims have been in the millions for nine straight weeks, dwarfing the previous record rise of 695,000 in October 1982. In this short amount of time, new jobless claims have also surpassed the 18-month Great Recession total.

But that headline total doesn’t include the 4.1 million Americans receiving benefits through the Pandemic Unemployment Assistance (PUA) program, the Coronavirus Aid, Relief, and Economic Security (CARES) Act-granted system that includes gig workers and others normally ineligible for benefits. As of May 16, 35 states had been paying out benefits.

But as the total number of new filings slows, the figure to watch will be continuing claims. Also known as the insured unemployment, 25.1 million remained on unemployment benefits as of May 9. The figure, however, is released with a two-week lag.

“Make no mistake about it, the unemployment situation is dire and likely to continue that way until the economy is opened back up,” Hamrick says. “Even then, significant challenges will remain.”

2. U.S. economy contracts the most since 2008 in the first quarter, but the worst is likely yet to come

If you’re trying to tell how the economy is performing on a broader scale, that’s where gross domestic product (GDP) comes in. GDP data tracks how much the economy expanded — or contracted — in a three-month period. It’s the U.S. economy’s main scorecard, and it’s not looking good, thanks to the pandemic.

The U.S. economy contracted by 4.8 percent on an annualized basis during the first three months of 2020, according to an advance estimate from the Department of Commerce. That’s the worst performance since the fourth quarter of 2008, when the financial system had plummeted into the depths of the Great Recession.

It’s significant because shutdowns to stop the spread of the coronavirus weren’t enacted until mid-March. Given that the economy plunged severely in just a short amount of time, it foreshadows a likely even-worse performance in the next three months of 2020. A tracker out of the Federal Reserve Bank of Atlanta predicts that the economy will contract by 41.9 percent in the second quarter, which would be the sharpest drop on record.

“How negative quarter one GDP was considering we were only shut down for less than two weeks — I think that’s unbelievable,” Azzarello says. “It’s telling us that the second quarter is going to be way more negative than we even expect.”

3. Consumer spending posts steepest declines on record

That plunge is largely tied to states’ stay-at-home orders, a consequence of social distancing measures to prevent the virus from spreading. And as tens of millions stay put in their homes, consumers have slammed the brakes on consumption. Though online retailers have seen a pick up in sales, it hasn’t been enough to plug the gap, as brick-and-mortar stores, airlines, hotels and restaurants see a drop in receipts.

None of this bodes well for GDP and the economy overall, given that consumption is the driver of growth.

Consumption dropped 7.8 percent the first quarter, GDP data showed. Meanwhile, sales at retailers and restaurants declined the most on record, plunging 16.5 percent in April, nearly double the 8.3 percent decline from March, according to the Department of Commerce’s report. That drop was exacerbated by sharp drops in dining out and shopping, with revenue at clothing and clothing accessory stores plunging 89.3 percent as sales at food and drinking establishments plunged 48.7 percent.

Nonstore retailers, including online shops such as Amazon, was the only category to see a pick up in sales, rising by 8.4 percent from a month ago.

But restrictions might not be the main source of the problem. Fear of catching the virus is preventing consumers from returning to brick-and-mortar stores, as is widespread unemployment that’s harmed Americans’ pocketbooks.

A nationwide Bankrate survey from May found that just about 1 in 3 say they’d be comfortable visiting a store within a month of its reopening. About 2 in 5 say they weren’t planning to shop at traditional in-person retailers as much as before the pandemic, the survey also found. That points to a continued slump in sales.

4. Consumer confidence takes a hit, suggesting a long road ahead for spending

All of this is taking a toll on consumer confidence, what many economists attribute as a leading indicator of where consumer spending is heading. If Americans aren’t confident about the direction of the economy, they might hold back on making purchases for even longer.

“Hopes of a V-shaped recovery have faded into more downbeat realism as stay-at-home orders have persisted and businesses have gone without sales,” Hamrick says. “As the financial downturn persists, more businesses, meaning employers, are at risk of becoming insolvent, states and localities face massive budget deficits and consumers lacking a vaccine are less likely to venture out into public even if they have money in the bank to spend.”

Consumer confidence fell to an eight-year low in April, but showed signs of stabilizing in a preliminary report from May, according to the University of Michigan’s widely-watched survey of consumers. The pick up was likely tied to the federal government’s $1,200 stimulus check disbursements.

“Confidence inched upward in early May as the CARES relief checks improved consumers’ finances and widespread price discounting boosted their buying attitudes,” said Richard Curtin, director of the Michigan poll, in a statement. “Despite these gains, personal financial prospects for the year ahead continued to weaken.”

A separate consumer poll from the Conference Board showed that confidence also ticked up in May, rising 86.6 to from 85.7 in April, which was a

5. Fed injects trillions to help smooth financial conditions

But the coronavirus has caused a two-front crisis — one tied to a plunge in sales and a surge in unemployment, and the other exacerbated by a tightening in financial conditions. It was so serious that it prompted the Federal Reserve to slash interest rates all the way to zero at two emergency meetings within 13 days of each other.

“The outbreak has disrupted economic activity in many countries and prompted significant movements in financial markets,” Fed Chairman Jerome Powell told reporters at a press conference following the Fed’s first emergency cut, a 50-basis-point reduction.

In the days since, the Fed has instituted an unprecedented, unlimited bond-buying program, pumped trillions in the market for short-term repurchase agreements, created 11 emergency lending facilities designed to get credit flowing across the economy and pledged to do more to support the financial system.

It matters for two reasons: When credit markets are dysfunctional, it pushes up interest rates for consumers and firms. That defeats the purpose of slashing rates to zero. And when stocks decline sharply and swiftly, it threatens solvency among firms.

“If financial markets were still stressed, that’s what would blow those dominos down even faster,” Azzarello says. “I think of financial markets and the real economy like two pieces dancing together.”

Treasury yields across the curve have plunged to their lowest levels ever, with shorter-term Treasury bills even trading in negative territory intraday since the pandemic rained fire on the financial system. Meanwhile, various indicators tracking volatility and stress among major markets, credit spreads and interest rates — from the St. Louis Fed Financial Stress Index to the Chicago Board of Options Exchange’s Volatility Index (VIX) — showed that financial conditions tightened in mid-March by the most since the financial crisis.

By most measures, however, the volatility appears to have subsided, largely thanks to the Fed’s interventions.

”The financial plumbing and all of the pipes seem to be working,” Azzarello says. “We have to fix one thing at a time, and the Fed did help. Now we just have to put people back to work on the real side of the economy.”

You can track how this impacts your wallet by looking at the spread between the 30-year fixed mortgage, one of the most popular forms of consumer borrowing. The spread surged in March and April to levels not seen since the 2008 global financial crisis, when credit tightened and lending slowed. When it comes to the coronavirus pandemic, experts say that rates rose partially because lenders were overwhelmed by refinancing applications at a time when investors across the financial system were flocking to cash.

“That was a clear indication that conditions were tight,” Azzarello says. “It’s not good enough for the Fed to do something and it not to flow through.”

6. As fears over a second wave loom, watch coronavirus case counts and hospitalization rates

Given that the coronavirus is the root of these problems, it might not come as a surprise that you should watch case counts across the U.S. and world, as well as hospitalization rates.

The contagion has spread to more than 5.5 million people around the globe as of May 25, with 1.7 million of those cases in the U.S, according to a tracker from Johns Hopkins University. Hospitalization rates, meanwhile, were flattening in the first few weeks of May, but were on the rise for more at-risk groups, such as individuals older than 65, according to data from the Centers for Disease Control.

Experts far-and-wide have warned that the path forward is wrought with unknowns, mostly because many epidemiologists have warned of a possible second wave. If that did indeed happen, leading to another round of shutdowns, it would spell even more trouble for the U.S. economy.

7. Other factors to watch: Inflation slows, housing starts plummet and manufacturing weakens

Virtually all corners of the economy have been hit hard during the pandemic, with some of the nastiest declines in real estate and manufacturing.

U.S. housing starts fell by 30.2 percent in April, the sharpest plunge ever according to records dating back to the 1950s, the Department of Commerce reported. Manufacturing activity, which was already hurting amid ongoing U.S.-China trade tensions in 2019, posted similar steep declines. A Federal Reserve gauge of industrial production shows that activity plunged 11.2 percent in April, the steepest decline on record, while the Institute for Supply Management’s Purchasing Manager Index fell 7.6 percentage points between March and April.

Inflation has been the biggest wild card of all. With massive amounts of stimulus coming out of both sides of Washington — Congress and the Federal Reserve — some experts have warned that price pressures could build in a few years. U.S. central bankers, however, indicated in records of their April gathering that they fear inflation’s evil twin: deflation. The overall effect of the outbreak was seen as putting downward pressure on prices, exacerbated by weaker growth and slower spending.

The personal consumption expenditures (PCE) index — the Fed’s preferred way of measuring inflation — rose 1.3 percent from a year ago, the weakest pace in four years. The Fed has an inflation target of 2 percent, which was challenged even during the decade-plus-long expansion. Another key measure of U.S. inflation, the core consumer-price index that excludes volatile food and energy categories, fell by the most on record in April to 0.4 percent.

“We know all of the numbers are going to be bad,” Azzarello says. “Now we’re talking about how bad really they’re going to be.”

What this means for you

The U.S. economy, without a doubt, is in a recession — a downturn that’s setting itself up to be the worst in anyone’s lifetime, according to Powell. But the official call of when that recession began will come from the National Bureau of Economic Research’s Business Cycle Dating Committee, a process that will likely take months as experts wait for data to be released and revised.

Tracking these indicators is an important way of determining where in the trenches the U.S. economy may lie, as well as how close to a recovery the broader system might be.

“Just a few months ago, we couldn’t have guessed how this would happen, but we now know how we got here,” Hamrick says. “We just don’t know what the path forward will look like exactly.”

Even then, no one knows for sure just how long the pain will last. Unemployment is expected to remain elevated through 2021, according to updated forecasts from the Congressional Budget Office. Growth is also projected to remain tepid, pointing to a slow and grueling climb out of the hole.

Given that no one can see the future, it’s important to remain focused on recession-proofing your finances. That includes prioritizing savings and building up an emergency cushion of cash in the event that you unexpectedly lose your income. Paying down debt and eliminating some discretionary items from your budget can help free up some breathing room in your wallet to put more funds toward those goals.

But there’s a silver-lining: Just as everyone across the country felt the economy slide into the depths of the worst economic crisis in generations, it will be easy to tell when the financial system is recovering.

“Normally, it’s not like this; one thing is really bad, and the other is OK. We don’t seem to have any of that right now,” Azzarello says. “But what makes this helpful is, when we’re getting out of it, we’re all going to know.”

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