John Carney


The lockdown of the U.S. economy and China virus pandemic this spring triggered the sharpest economic contraction since the government began keeping track of national output after World War Two.

The Atlanta Fed’s GDPNow real-time estimate shows gross domestic product declining at an annual rate of 32.1 percent. The median forecast of Wall Street economists surveyed by Econoday is for a 35 percent contraction. Some analysts think the economy may have shrank at a pace closer to 40 percent.

The biggest recorded quarterly decline in modern U.S. history was 10 percent in the first three months of 1958. The worst drop during the Great Recession was 8.4 percent.

Confusingly, however, this does not mean that the pandemic caused the U.S. economy to shrink by one-third. The pandemic has been bad for the economy but it has not been anywhere near that bad. If our economy had suffered a contraction anywhere near that size the unemployment rate would likely be closer to 30 percent instead of the 11 percent or so reported last month.

Economic output in the April-through-June period likely 7 to 11 percent lower in the second quarter than in the first. That’s still a terrible contraction but far less scary than the headline number suggests.

In the U.S., the official gross domestic product number released every quarter by the Bureau of Economic Analysis gets reported as an annualized percentage change in GDP from the previous quarter. In other words, what gets reported is how much the economy would contract if it shrank at the same rate for a full year.

A lot of our economic statistics get reported as annualized rates. Last week, for example, we reported that existing homes were sold in July at a seasonally adjusted annual rate of 4.72 million. This does not mean that Americans are on track to buy 56 million homes in 2020, which would be the equivalent of 40 percent of American homes changing hands in a single year. Instead, it means that home sales would amount to 4.72 million if they sold at the July pace for the entire year, so that just 3 percent of existing homes would change hands.

Annualizing the rate of change is useful, especially in normal times, for tracking the direction of data over time. It allows us to compare, for example, a quarter’s growth rate to annual growth rates in the past on an apples-to-apples basis. But in at times of abrupt and extreme changes, or short-lived change, it risks creating an exaggerated impression of the change.

Most of the rest of the world reports economic output differently. Instead of an annualized rate, other countries report the change in the quarter’s GDP compared with the prior quarter. That gives a pretty good snapshot of a particular quarter’s contribution to annual growth but makes it harder to compare a quarter’s output to years past. Journalists and analysts often annualize growth numbers in Europe to get a version consistent with the U.S. method.

Sometimes this leads to confusion. Americans in good times may have overestimated the strength of their economic growth compared with other counties because it got reported at a 2 percent annualized rate while, say, France got reported at 0.5 percent quarterly growth. These would have been more or less equivalent GDP growth figures. And this year, some pundits falsely claimed the U.S. was doing worse in the first quarter than South Korea, apparently not realizing the two countries report GDP differently.

Making things even more confusing, some people prefer to use the change from the year-ago quarter. This is how the Federal Reserve, for instance, looks at GDP when forecasting its growth rates.

It would probably be a good practice for journalists reporting U.S. GDP in the second quarter to report both the annualized rate and the nonannualized percent change. And then add in the change from a year ago numbers where appropriate.

One thing that is clear already is that analysts were way off the mark in their early estimates of the economic impact of the pandemic. Wall Street forecasters were initially predicting closer to a ten to 15 percent annualized decline in the first quarter. JP Morgan predicted 14 percent annualized decline in March, which Marketwatch described as a “stunning decline.” Goldman Sachs was the most pessimistic in March, predicting a 24 percent decline, five times its earlier estimate of a five percent contraction. (Wall Street quickly became far more pessimistic. By April, J.P. Morgan said the economy would contract 40 percent.)

The same annualization method will likely produce an exaggeration the other way in the reports of third-quarter GD. Wall Street analysts are forecasting growth rates north of 20 percent—and some as high as the mid-thirties.

Author: John Carney

Source: Breitbart: GDP Suffered Horribly Under Pandemic Lockdowns But Not as Bad as Headlines Will Suggest

Factory activity in the U.S. surged higher than expected in June, suggesting that the broader economy grew for the second consecutive month after April’s contraction.

The Institute for Supply Management’s index of manufacturing activity jumped 9.5 percentage points to 52.6 in June. The gauge of new orders rose 24.6 points to 56.4, the largest ever monthly increase. The production component of the index also rose by more than 24 points to 57.3.

The Purchasing Managers Index is constructed from the results of surveys of executives in manufacturing businesses.

Economists had expected a reading of 49, with the highest estimate in those surveyed by Econoday 51.5. June’s score was the best since April of 2019.

“The manufacturing sector is reversing the heavy contraction of April, with the PMI increasing month-over-month at a rate not seen since August 1980, with several other indexes also posting gains not seen in modern times,” ISM’s Timothy Fiore said in a statement.

The measure of employment improved in June but still shows jobs shrinking in the sector.

A separate survey of purchasing managers conducted by the data firm IHS Markit also showed a powerful rebbound.

“US manufacturers have reported a marked turnaround in business conditions through the second quarter, with collapsing production and demand in April at the height of the COVID-19 lockdown turning rapidly to stabilisation by June. The PMI posted a record 10-point rise in June amid unprecedented gains in the survey’s output, employment and order book gauges,” Chris Williamson, Chief Business Economist at IHS Markit, said.

Williamson said:

“The record rise in the New Orders Index, coupled with low inventory holdings, bodes well for a further improvement in production momentum in July. A record upturn in business sentiment about the year ahead likewise hints that business spending and employment will start to revive. However, while the PMI currently points to a strong v-shaped recovery, concerns have risen that momentum could be lost if rising numbers of virus infections lead to renewed restrictions and cause demand to weaken again.”

According to the IHS Markit survey, employment in manufacturing declined for the fourth consecutive month.

Author: John Carney

Source: Breitbart: Manufacturing Recovery Was Much Stronger Than Expected in June

Jobless claims unexpectedly plunged in the week ended November 23, indicating that the American labor market remains strong.

Initial claims for state unemployment benefits fell by 15,000 to 213,000, the Labor Department said Wednesday. Economists had been looking for a smaller decline.

The prior week’s claims were revised up by 1,000 to 228,000.

The drop in claims is significant because claims had been rising in the two prior weeks. Many economists expect claims, which are a proxy for layoffs, to climb because they view employment as likely to peak soon given the extremely low levels of unemployment and sluggishness in business investment and the manufacturing sector.

Jobless claims can be volatile week-to-week. Economists prefer to look at the four-week average of claims as a more reliable indicator of the labor market. This figure moved down by 1,000 to 220,000.

Author: John Carney

Source: Breitbart: Jobless Claims Plunge by 15,000 to 213,000

The unemployment rate for African-Americans fell to the lowest level ever recorded in August, dropping from 6 percent to 5.5 percent.

One result: the persistent gap between white and black unemployment also narrowed to its smallest on record.

The unemployment ratio has averaged around 2 to 1 or so for decades, meaning the black unemployment rate is typically twice the white unemployment rate. In good times, the unemployment rate of whites and blacks falls but the gap remains. And in bad times, the unemployment rate for whites and black rises, but black unemployment typically remains around twice that of white employment.

A year ago, the black unemployment rate stood at 6.6 percent while the white unemployment rate was 3.4 percent, meaning black unemployment was 185 percent of white unemployment.

In August, the gap narrowed so that black unemployment was under 162 percent of white unemployment. That is the smallest gap ever in records going back to January 1972.

This is particularly remarkable because it comes at a time of remarkably low unemployment. Prior to the Trump era, the last time the gap fell below 170 percent was in August of 2009, when the black unemployment rate was 14.8 percent and the white unemployment rate was 8.9 percent. Back then the gap declined because white unemployment was increasing at a faster clip than the already sky-high black unemployment.

In other words, the decline in employment inequality now is undeniably the best on record because it comes in the context of falling unemployment.

Author: John Carney

Source: Breitbart: Black Unemployment Hits Record Low, Black-White Unemployment Gap Shrinks to Smallest Ever

President Donald said Friday that American companies are “hereby ordered” to start looking for alternatives to China.

Trump was responding to news overnight that China was hiking tariffs on U.S. goods. The Chinese move caught the White House by surprise, according to a person familiar with the matter. As late as Thursday evening, U.S. officials were talking up the potential for expected September talks between the U.S. and China to make progress.

Trump is meeting with U.S. trade officials in the White House Friday morning, including U.S. Trade Representative Robert Lighthizer and trade advisor Peter Navarro.

Trump also struck a decidedly different tone about Chinese leader Xi Jinping, whom he normally describes in respectful and friendly terms. In a tweet, he asked “who is our bigger enemy, Jay Powell or Chiarman Xi?”

Trump also said China had not lived up to promises to stop fentanyl shipments to the U.S. As a result, he said he was ordering FedEx, Amazon, UPS , and the U.S. Post Office search for and destroy any fentanyl in shipments from China.

The legal basis for Trump’s orders was not immediately clear. Trump said he would make an official announcement about trade with China Friday afternoon. The “order” may be a warning to U.S. companies that tariffs are going much higher, making manufacturing in China for U.S. markets prohibitively expensive.

Author: John Carney

Source: Breitbart: Trump Orders U.S. Companies to Look for Alternatives to China

The U.S. economy grew at a healthy pace in the second quarter, slowing by less the economists had expected from earlier in the year amid multiple headwinds, including weaker global demand, higher mortgage rates, and uncertainties over trade policy.

Gross domestic product rose at a 2.1 percent annual rate from April through June, the Commerce Department reported Friday. Gross domestic product is a measure of all the goods and services produced in the U.S. after adjustments for seasonality and inflation.

Consumer spending was a source of strength for the economy, expanding at a 4.3 percent rate. Earlier in the year, consumer spending had slumped to a 0.9 percent growth rate. But the increase in consumer spending was offset by a decline in business investment. So-called nonresidential fixed investment fell at a 0.6 percent rate, down from a rise of 4.4 percent in the first quarter.

The U.S. economy has officially entered the longest expansion in its history, with GDP rising for 121 consecutive months. That is longer than the previous 120-month record set in the decade between 1991 to 2001.

Although the second quarter’s growth rate was slower than 3.1 percent in the first three months in the years, at 2.1 percent it was better than economists expected. According to Econoday, the median forecast was for 1.9 percent, with a range of 1.6 to 2.2 percent.

Even at the slower pace of the second quarter, the economy is still performing beyond what Federal Reserve economists see as its long-range potential. In March, the median projection of Fed officials was for 2.1 percent growth in 2019. If the second-quarter’s 2.1 percent pace holds up in subsequent revisions, the economy is almost certain to grow by more than forecast.

Author: John Carney

Source: Breitbart: U.S. Economy Grew at 2.1% Pace in Second Quarter, Better than Expected

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