WASHINGTON (AP) — Americans increased their spending by a modest amount in February but the expectation is that spending will be hit hard in coming months reflecting the shutdown of the American economy by the coronavirus.
The Commerce Department reported Friday that spending edged up 0.2% in February, matching the January gain but below the 0.4% increase in December.
Personal incomes rose a solid 0.6 percent in February, matching the January gain. Those strong increases are likely to fall-off as millions of Americans lose their jobs although the Senate has passed a $2.2 trillion economic relief package that would cushion the blow by providing checks of up to $1,200 to individuals and expanding unemployment benefits.
The hope is that the relief package, which was expected to clear the House Friday, will keep the economy from falling into a deep recession because of the shutdowns. The Federal Reserve has also moved to slash its key interest rate to a record low near zero and is providing billions of dollars in support to keep credit flowing.
Economists have said all these efforts will not be enough to keep the country out of a downturn, but they could help promote a stronger and quicker rebound once the virus is contained.
A key inflation measure was up 1.8% for the 12 months ending in February, according to the latest data, below the Fed’s 2% target. The absence of inflation worries has allowed the central bank to focus on supporting economic growth.
Consumer spending accounts for 70% of economic activity but surveys are already showing the virus is having a big impact on the biggest driver of the economy. Coresight, a data research firm, found that almost half of U.S. consumers — 47% — are now extremely concerned about the outbreak, up 10 percentage points in just one week.
“With high-frequency data showing a collapse in economic activity over the past couple of weeks, overall consumer spending is likely to have plummeted in March,” said Andrew Hunter, senior U.S. economist at Capital Economics.
Hunter said he was expecting around a 40% decline in consumer spending in the April-June quarter.
Many economists believe that a recession has already begun although they are forecasting it could be a short one, lasting only two quarters, if the government’s efforts to contain the coronavirus are successful.
The Trump administration is hoping to get the new programs in the $2.2 trillion relief package up and running quickly. Treasury Secretary Steven Mnuchin said Friday he wanted to get a program to supply small businesses with bank loans operational in a week and IRS payments of up to $1,200 per individual being sent to households in three weeks.
Asked in an interview on Fox Business Network about the record 3.3 million applications for unemployment benefits reported on Thursday, Mnuchin said, “These numbers matter because people are losing their jobs.” But he said the government programs in the rescue bill should either get people back to work or supply financial support until they can find new jobs.
The 1.8% 12-month rise in the inflation gauge tied to consumer spending has been below the Fed’s 2% target for more than a year and now is expected to fall even lower with the drop-off in economic activity and a big fall in energy prices.
The spending report said that the personal saving rate rose in February to 8.2% of after-tax income, the highest level in 11 months and up from 7.9% in January.
American Consumers Will (Or Won’t) Drive The Economic Recovery
If you are wondering how the stock market has climbed nearly 30% from the March 23 lows while the country has lost 20 million jobs in April, you’re not alone.
It’s head-scratching to try and think of a scenario where stocks are worth as much or almost as much as they were back in February when the country had a 3% unemployment rate compared to 14.7% today.
A common refrain from analysts and Wall Street veterans is that the stock market is forward-looking. So everything bad happening today has already been priced in. Or perhaps with parts of the country slowly reopening, that the economy will quickly spring back to life. Maybe there’s justifiably a belief that no matter how bad things get, the Federal Reserve will step in and flood the market with liquidity, effectively removing any downside risk.
Whatever the real reason is for the surge in stock prices since late March, there’s one thing that many analysts say will either spur the market higher or send it crashing back down to the March lows: you and me, the consumer.
“It’s all going to come down to consumer spending. If we’re all sitting inside and not out spending money in September-October, the market’s not going to like that — the market will go down,” said Scott Wren, senior global market strategist at Wells Fargo Investment Institute, in a recent interview.
Consumer spending accounts for roughly 65% of our country’s GDP. So if consumers don’t feel comfortable leaving their homes and getting back out to shopping centers, malls or restaurants, it’s going to be nearly impossible for a sustained economic recovery.
Richard Cordray was the first director of the Consumer Financial Protection Bureau. He says consumers “are likely to come out of the covid-19 crisis no longer able, or willing, to bear the same load as before. That means that Wall Street investors counting on ordinary families to continue propping up the business cycle are likely to be sorely disappointed.”
“First, the rapidly deteriorating job market will hurt consumers badly, and for many the damage will not be temporary. Until last month, unemployment was at historic lows: It was 3.5 percent in February. More hours worked meant more income for most families while pushing the wage curve higher. All that positive momentum is gone. Unemployment is certain to spike above 15 percent soon, and many small businesses that operate on thin margins will go bankrupt.
“Second, many businesses will not regain the same vigor because they are dependent on strong consumer demand. Inevitably, some Americans will remain unemployed longer than others. Those who go back to work quickly are still likely to emerge from their experience of sheltering at home with less ability to resume spending at the same levels. Large numbers of households are falling behind on major debt obligations, such as rent or mortgage payments, auto loans, and credit card bills. Even those who return to pre-crisis jobs will have to cope with the burden of this overhanging debt, which will constrain their discretionary spending for months or even years to come.
“Third, the wrenching experience of the covid-19 pandemic is likely to change many consumers’ behavior. As happened in the Great Depression, this crisis has reminded people of the fragility of their financial situations, making them more cautious about borrowing and spending. Social changes, too, are likely to linger. Until people feel sure about an effective vaccine and manageable treatment for the virus, they may be reluctant to travel or even to circulate as widely as they used to, producing lower levels of economic activity overall.”
The Effects of Job Loss
And Avi Dan, the CEO of Avidan Strategies, says the damage from the unprecedented job losses could last for years in what he calls “America 2.0”
“After most recessions had ended, consumers’ attitudes and behaviors often return to “normal” within a couple of years. This time it may be different. Given the unprecedented extreme events we are witnessing, consumers’ optimism just might be replaced by a heightened sense of economic vulnerability. Caution might replace consumerism, and this could persist for a decade or longer.
“Given these facts, there is a good possibility that consumer attitudes and behaviors, shaped during this recession, will linger substantially beyond its end, as we enter a new national phase, America 2.0. The majority of consumers may well retain the different consumption habits developed during the recovery with what they’ve adapted to during the recession.”
Bill Gates Joins Growing Chorus Against Trump’s Plan to Reopen Economy
Bill Gates is the latest in a growing chorus to voice concerns over statements made by President Trump that he would like to get America’s economy running again by Easter.
During a recent TED talk (as reported by Recode), Gates said “it’s very irresponsible for somebody to suggest that we can have the best of both worlds,” implying our ability to contain the virus and keep Americans safe while keeping the economy open and running at full speed.
He added “There really is no middle ground, and it’s very tough to say to people, “Hey, keep going to restaurants, go buy new houses, [and] ignore that pile of bodies over in the corner. We want you to keep spending because there’s maybe a politician who thinks GDP growth is all that counts.”
Trump has said he wanted to re-evaluate his administration’s initiative to slow or contain the spread of the virus which included “social distancing.”
The initial 15-day period ends next week and on Tuesday during an Fox News town hall, Trump said “I give it two weeks,” suggesting he was ready to end the 15-day self-isolating guidelines when they expire.
“I guess by Monday or Tuesday, it’s about two weeks. We will assess at that time and give it more time if we need a little more time. We have to open this country up.”
He added “I would love to have the country opened up, and rarin’ to go, by Easter” and “people can go back to work and practice good judgment.”
Trump reasoning for the accelerated timeline is that the longer the economy is effectively shut down, the longer it will take to get it up to full speed.
However, Gates is just one of a growing chorus of experts and politicians who worry that pushing the economy to reopen in an effort to help the stock market recover is ignoring the very real likelihood that we would be putting citizens at danger if the spread of the virus isn’t under control.
New York Gov. Andrew Cuomo, whose state is battling the highest number of coronavirus cases in the US, made similar comments to Gates on Tuesday.
“No American is going to say, accelerate the economy at the cost of human life, because no American is going to say how much a life is worth. Job [No. 1] has to be save lives,” he said.
Maryland Gov. Larry Hogan, a Republican and head of the National Governors Association, expressed concern over the need to meet a schedule on an “imaginary clock.”
No matter how much pressure President Trump places on governors or even citizens to get back to work, legally there’s not much he can do.
Legal experts say a U.S. president has quite limited power to order citizens back to their places of employment, or cities to reopen government buildings, transportation, or local businesses.
The policies that Trump announced on March 16 for slowing the spread of the novel coronavirus (such as social distancing) were merely guidelines, and the same goes for any newer, less restrictive policies he unveils, according to Robert Chesney, a professor of national security law at the University of Texas.
“Those are guidelines. He can change his advice,” Chesney said. “He is free to advocate. And that is an important part of the presidency — the bully pulpit.”
Entertainment Companies and Retailers Could Face Mass Extinction
Whether or not the country decides to enact official lockdown measures in an attempt to halt the spread of the coronavirus, some cities like Los Angeles New York City are taking their own measures to try and halt the spread.
Mayors in both cities ordered bars to close and restaurants to only offer take-out and delivery services.
On top of that, movie theaters and concert venues in both cities have been ordered to close.
How other cities handle the coronavirus outbreak remains to be seen, but it’s clear that any business that relies on people gathering in one place could face a serious survival threat in the coming weeks and months.
Here are a few industries and businesses that could face extinction in the coming months if the coronavirus outbreak become a full on pandemic here in the US:
The first ones to come to mind are theater companies if the order to close becomes widespread. The largest two are Cinemark (NYSE: CNK), AMC Entertainment (NYSE: AMC). Also consider National CineMedia (NASDAQ: NCMI) which runs all the ads you see before a movie.
Michael Pachter, an analyst at Wedbush Securities says “There is a genuine concern that [coronavirus] will limit theatrical attendance globally, whether driven by theater closures or fear of contamination.”
Also look at financial pressure being put on companies in the food and entertainment space like Dave & Buster’s (NASDAQ: PLAY).
Particularly vulnerable could be Diversified Restaurant Holdings (NASDAQCM: SAUC), which operates 64 Buffalo Wild Wings Franchises. With restaurants forced to shut down, the company could focus more on take-out orders for it’s popular wings and appetizers.
However, with nearly every major sports league shut down, including the upcoming NCAA March Madness tournament, there’s little need for large orders of wings to feed family and friends at home.
Most vulnerable could be the already struggling retailers like Ascena Retail Group (NASDAQ: ASNA) which owns brands like Ann Taylor, Loft and Lane Bryant.
JCPenney (NYSE: JCP) has managed to hold on a lot longer than many predicted, but this latest blow could be the final one for the company originally founded in 1913. The company’s footprint is now so small that any drop in business due to shoppers staying away could be fatal.
The last retailer is GNC (NYSE: GNC), the seller of supplements and vitamins. This one might be a “beating a dead horse” type of investment as the share price has already plunged from 98% in the last five years. But there’s never any foot traffic in the stores despite near-permanent sales and discounts, so this could be the final straw.
On the other side of the coin, if there are quarantine efforts put into place, it’s clear that a vast majority of Americans will simply double or triple their orders from Amazon for all their purchases. We will also likely see viewing time on Netflix soar.
Also expect a massive uptick in business for delivery companies like GrubHub (NYSE: GRUB).
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