AIIS September 2020 Market Update

SEATTLE (Scrap Monster): The economic outlook for the United States and the world during 2020 has improved according to a report from the Organization for Economic Co-operation and Development (OECD), though the group cautioned that “the outlook is subject to considerable uncertainty.”

The OECD had projected in June that the U.S. economy would contract by 7.3 percent this year. In September, though, it revised that forecast to 3.8 percent shrinkage. This was the biggest adjustment among the G20 countries.

Globally, the OECD’s contraction forecast went from 6 percent to 4.5 percent. In China, where the coronavirus originated, the economy is now expected to grow by 1 percent this year. Negative growth of 2.2 percent had been predicted in June.

The improved outlook, according to the organization, is based on the fact that, following the economic shock of the first few months of the pandemic, “Output picked up swiftly following the easing of confinement measures and the initial re-opening of businesses.”

The report, however, frequently warned that conditions may change, and the word “uncertainty” appears 26 times in the 17-page document, including in the title.

“Growth prospects depend on many factors, including the magnitude and duration of new COVID-19 outbreaks, the degree to which current containment measures are maintained or reinforced and feed through to confidence, the time until an effective treatment or vaccine is deployed, and the extent to which significant fiscal and monetary policy actions support demand,” the report stated.

Although economic performance has improved with the end of full lockdowns, ongoing restrictions, such as physical distancing mandates and limits on the size of gatherings, will continue to “raise business costs, particularly in services sectors heavily reliant on social interactions.”

In 2021, the OECD foresees 4 percent growth in the United States and 5 percent worldwide. China’s economy is expected to expand by 8 percent.

During the second quarter of the year, gross domestic product in the United States shrunk by an annualized rate of 31.7 percent, according to the Bureau of Economic Analysis. The bureau, in August, revised its estimate from the 32.9 percent contraction that was calculated in July.

The U.S. economy has continued to claw back some of the more than 20 million jobs that were lost in the spring, as it added 1.4 million jobs in August, lowering the unemployment rate 1.8 percentage points to 8.4 percent, the Bureau of Labor Statistics announced. The country still has 7.8 million more unemployed people than it did in February.

“These improvements in the labor market reflect the continued resumption of economic activity that had been curtailed due to the coronavirus (COVID-19) pandemic and efforts to contain it,” the bureau stated. “In August, an increase in government employment largely reflected temporary hiring for the 2020 Census. Notable job gains also occurred in retail trade, in professional and business services, in leisure and hospitality, and in education and health services.”

About one-sixth of the new jobs in August were temporary positions with the Census Bureau.

The Federal Reserve, like the OECD, has become more optimistic in its economic projections, revising its forecast for the U.S. economy to a 3.7 percent contraction for 2020. In June, the Fed predicted 6.5 percent. Also, with the improvement in the labor market during recent months, it now expects the unemployment rate at the end of the year to be 7.6 percent, instead of the 9.3 percent that it foresaw in June.

To one’s surprise, the central bank left the target range for the federal funds rate unchanged at 0 to 0.25 percent during its Sept. 15-16 meeting.

Fed Chairman Jerome Powell said earlier in the month that “the economy’s going to need low interest rates, which support economic activity, for an extended period of time.”

“It will be measured in years,” Powell said. “However long it takes, we’re going to be there. We’re not going to prematurely withdraw the support that we think the economy needs.”

The Federal Reserve has long had an inflation target of 2 percent annually, with the expectation that if prices exceeded that level, interest rates would be raised to apply brakes to the economy. Powell said in August, though, that the central bank would accept inflation – which remained below the target even during the strong pre-pandemic economy – running higher than 2 percent “for some time.”

“Inflation that is persistently too low can pose serious risks to the economy,” Powell said. “Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.”

Notwithstanding some signs of economic recovery, consumer confidence remains shaky. The Conference Board’s Consumer Confidence Index declined by nearly 7 points to 84.8 in August. The index was at 132.6 in February.

“Consumer spending has rebounded in recent months but increasing concerns amongst consumers about the economic outlook and their financial well-being will likely cause spending to cool in the months ahead,” the board’s senior director of economic indicators said.

The University of Michigan’s Index of Consumer Sentiment, though, showed modest growth in August, rising 1.6 points to 74.1. In February, the index reached 101.

“The small August gain reflected fewer concerns about the year-ahead outlook for the economy, although those prospects still remained half as favorable as six months ago,” the index’s chief economist said.

Among manufacturers, confidence grew stronger in August, as the Institute for Supply Management’s Purchasing Managers Index recorded its fourth straight monthly increase to reach 56, its highest point in 21 months. Of 18 industries surveyed for the index, 15 reported growth.

“The [manufacturing] sector continued its recovery in August, the first full month of operations after supply chains restarted and adjustments were made for employees to return to work,” the chair of the institute’s Manufacturing Business Survey Committee said. “Survey Committee members reported that their companies and suppliers operated in reconfigured factories, with limited labor application due to safety restrictions. Panel sentiment was generally optimistic (1.4 positive comments for every cautious comment), though to a lesser degree compared to July.”

Housing starts in July increased 22.6 percent from June and were 23.4 percent higher than the July 2019 level, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales jumped 24.7 percent in July, the National Association of Realtors reported, with the group’s chief economist saying, “The housing market is well past the recovery phase and is now booming with higher home sales compared to the pre-pandemic days. With the sizable shift in remote work, current homeowners are looking for larger homes and this will lead to a secondary level of demand even into 2021.”

The Dow Jones Industrial Average closed August at 28,430.05, almost exactly where it started the year. The S&P 500 ended the month at 3,500.31, up 8.3 percent year to date.

The dollar on Aug. 30 was trading at 0.84 euros, 0.78 pounds, 105.69 yen and 6.81 yuan.

Courtesy: AIIS