After the relaxation of the lockdown norms by states triggered optimism and an early uptick in activity, the momentum has since been fading away as the US economy enters Q4 2020.
The coronavirus pandemic and the ensuing crisis hit consumer spending at unprecedented levels. Sales of consumer goods had seen its largest dip (8.7 percent) in US economic tracking history in March 2020.
With states opening up in May, retail saw an initial surge with the record largest monthly jump of 17.7 percent helping corporate recover up to 63 percent of the April-March losses. Retail has since seen growth, albeit with slowing momentum, as August saw growth in retail sales of 2.6 percent compared to the same month in 2019.
Chart: US GDP Growth from 2010 to 2020
US’ industrial output was hit on similar levels as buying. Industrial production which covers sectors like manufacturing, utility and mining, has only partially recovered from the march wounds. Industrial output in several critical subsectors like construction machinery evaded the worse, staying short of 2008 financial crisis level contractions, helped by the US government’s infrastructure stimuli and more focus on e-commerce sales. Nevertheless, the US manufacturing sector, which employs 13 million people, could yet see its worse in the coming months. As inventories are piling in many sectors and corporate loans have plunged, companies are staying away from investing in stock wary of a slow Q4 2020.
The State Of The US Economy – In 7 Points
- The revenue of small businesses has declined by one-fifth on average since January 2020.
- Unemployment number of the United States labor force multiplied fourfold between January and April.
- People not part of the labor force but seeing employment is continuing to grow after touching 4.5 million in April.
- Personal savings rate in the United States reached its peak level in April 2020.
- The income-shock has had the worst impact on families with children and low-income.
- More than 20% of households in 26 states were behind on their rent (data from July).
- In mid-2020, food insecurity rate had grown by more than 100% for families with children from 2018.
The Dead Inventory headache
United States is witnessing a warehouse shortage despite unprecedented growth sales after reopening. Recently, logistics consultants Buy Box warned of warehouse shortage in Q4 of 2020 with e-commerce giants like Amazon, the biggest service providers of the US economy, struggling to find inventory space and last mile delivery providers.
The United States oil and gas inventories are in a similar state. The recovery of crude imports has been slow as refiners globally continue to limit number of barrels produced. The US crude oil and products stocks saw their fifth dip in six weeks as total stocks decreased by only 5 million barrels last week. This means the recovery from the record inventory number of 2.11 billion barrels at July start has only seen 23 million barrels sold. The major impediments in oil normalizing are domestic consumption which still remains way down from normal and external factor of slow imports, led by Saudi Arabia. While the total volume of oil and gas products in the domestic market dipped 12% below its five-year average in August, refinery output was 15% down from the average.
The United States COVID arsenal inventories are also facing the prospects of dead surplus. Perhaps a full circle from the shortages in March and April, the US government’s $3 billion push to manufacture thousands of ventilators has led to massive unused inventory in government stockpiles as demand faded in recent months. After President Trump invoked the federal Defense Production Act, General Electric, Ford, Philips and other manufacturers took to delivering the vital machines, leading to 94,000 unused ventilators in US government inventory currently.
Similarly, the US government-led distribution of COVID-19 drug remdesivir is now resulting in dead inventory, a far cry from the extreme shortage during the early months of the outbreak. Since July, hospitals fighting COVID outbreaks have declined one-third of the US government allocated supply of drug made by Gilead Sciences.
US Economic struggles continue in Q4 2020
While stock markets flatter to deceive and President Trump touts the economy as stronger than ever, an unprecedented inventory problem has hit the United States. In Q2 2020, US firms’ changes in inventory (leading indicator of the US economy’s overall performance) decreased by an unthinkable $286.41 Billion. For comparison, the decrease in stocks of goods held by firms in the US during Q1 2020 stood at $80.1 Billion.
Chart: United States Changes in Inventories over a 3 year period
Q3 may have begun with a bang but the bounce back has slowed down with only a 0.4% increase in output on the month, less than half of what economic experts had forecasted. The corporate distress is also thrown into the spotlight with the dramatic levels of large corporate bankruptcies in 2020. 45 US companies with $1bn+ in assets have already filed for Chapter 11 bankruptcy by 17 August. In Comparison to the ‘Year of Bankruptcies’ i.e. 2009, the number stood at 38. However, bankruptcy is also a common way for businesses facing financial distress to restructure and survive.
Recently, Barclays Chief US Economist Michael Gapen stated that reopening optimism of July has since faded and the numbers suggest there is a lot less momentum as US economy heads into Q4 2020. Gapen also said that if there are no more efforts by the government like benefits to households and more unemployment wage support the pace of improvement is certainly going to slow down. Gapen concluded, “It’s related to two things. One, that we’ve bought all the goods we needed to buy and further growth needs to come from services, which are deeply impacted by Covid, and second is the government fiscal stimulus that keeps getting pushed out.”
Watch: Barclays Chief US Economist says US Economy will decelerate going into Q4 2020
US Federal Reserve has vowed to keep supporting businesses and households for several years as US economy looks likely to recover from the pandemic impact at snail’s pace.