The May US data have been modestly uplifting to this point, specifically the surprise payrolls gain and lower unemployment rate, improved inflation data, and a smaller contraction in manufacturing conditions. None of it came close to making up for the terrible March and April readings, but it’s a start. The coming week’s data will shed light on whether that improvement continued and if it was spread across several industries, particularly the retail, manufacturing, and housing sectors.
MAY RETAIL SALES LIFTED BY VEHICLES, STATE REOPENINGS
The May retail sales report is likely to be the closest-watched indicator of the week. As states moved to reopen retail establishments in the month, pent-up demand is expected to fuel a rebound. However, some consumers may still be wary.
Industry-reported vehicle sales rebounded from a dismal April showing as dealerships reopened, so the motor vehicle and parts category is poised for a monthly gain in Tuesday’s report. Additionally, consumers could now shop and dine out in most states with certain restrictions, propping up the other sales categories.
Even if the data improve significantly, it will take several months for full state reopenings to bring sales back up to pre-COVID levels. And that’s assuming that consumers are ready and, more importantly able, to continue to increase their spending.
MANUFACTURING READINGS CONTINUED TO RECOVER
The first manufacturing conditions readings for June are expected to show a second straight move forward from April’s bottom, though they are still likely to indicate continued contraction. The New York Fed’s Empire State reading, released on Monday, and the Philadelphia Fed’s manufacturing index, released on Thursday, have been negative since March, but state reopenings helped the readings to a partial recovery in May. That trend is expected to continue in June.
MANUFACTURING PRODUCTION MAY CONTRACT AGAIN
The negative May conditions readings suggest that manufacturing production posted another, albeit smaller, decrease in the month. Industrial production fell by 11.2% in April, with factory production down 13.7%. Motor vehicle production alone fell by 71.7%. The rebound in sales, and the anticipation of more improvement in June, could be an upside risk for the May data.
As for utilities and mining, a rebound is likely from their April dips. The one thing that COVID cannot stop is the summer heat, and it started to hit some areas of the U.S. in May, even a little earlier than normal. The result should be increased electricity production and mining activity.
BUSINESS INVENTORIES, SALES DOWN IN APRIL
April business inventories are on track to fall by 1.3% when they are released on Tuesday, pending a revision to the retail inventories number, currently at a 3.6% decline. Wholesale inventories rose by 0.3%, while factory inventories fell by 0.4%.
Based on data already released, business sales are on track to plunge by 15.2%, hopefully the low point of this cycle. Retail trade sales fell 15.1% in April but are subject to revision with Tuesday morning’s release. Wholesale sales fell by 16.9% and factory shipments fell by 13.5%.
HOME BUILDING SECTOR LIFTED BY LOW RATES, BUT STILL CAUTION
Home construction was one of the sectors hardest hit by the COVID-19 shutdown, even as construction remained an essential service in most states, however, the weekly MBA data have pointed to continued gains in new mortgage application activity after an initial decline at the end of March, with record low mortgage rates the key factor.
That pent-up demand should translate into a boost in home building in the coming months. However, builders will remain cautious due to the high level of unemployment and concerns about a second wave of COVID-19 in the fall.
The NAHB housing market index partially rebounded in May after a huge drop in April, with the 6-month outlook higher, suggesting that housing starts and permits are primed to rebound after falling by 30.2% and 20.8%, respectively, in April.
INITIAL CLAIMS DECLINED CONTINUE, BUT MILLIONS STILL IMPACTED
The level of initial jobless claims has slipped for 10 straight weeks after the initial spike, with only 1.5 million people filing last week compared with 7 million in late March, but considering that the 1.5 million level is still well above any weekly gain ever posted before the COVID-19 crisis, the improvement is bittersweet.
This week’s data is for the June 13 employment survey week and is likely to represent a significant improvement over the 2.446 million level in the May 16 employment survey week. Normally this would be a positive sign for employment report that month, but in the current environment it is hard to rely on old rules.
The continuing claims level has declined in two of the last three weeks after a consistent assent since the start of the crisis, so another decline in the coming week’s data would be viewed as a positive sign that rehiring has picked up in some sectors. It will take a long time for the nearly 21 million people receiving benefits to return to work.
STATE EMPLOYMENT DATA TO SHOW WHERE MAY GAINS HAPPENED
Data on state payrolls for May, released on Friday, will provide some more detail on that surprise 2.5 million jobs gain. While the improvements were generally widespread, rebounds were focused in April’s hardest-hit sectors – food services, retail trade and health care.
Friday’s data will show what states benefited the most from the May rebound. The data last month indicated payrolls declined in all 50 states, with New York among the hardest hit. There were also significant declines in California, Michigan, and Vermont. It is reasonable to expect this is where improvement will be centred, while a second straight decline in any state would suggest that area is lagging.
The state breakdown of unemployment rates will also prove telling, as a decline can mean people are finding work, but also that some people are leaving the labour force in those areas. Last month, the highest unemployment was in Nevada at 28.2%, due in large part to Las Vegas hotels and restaurants being shuttered.
LEADING INDICATORS REBOUND LIKELY
The index of leading indicators fell sharply in March and April but should post a rebound in May as several components improved. The level of initial claims has continued to decline, and stock prices rose in May, both positive factors for the overall index. In addition, the factory workweek was longer, consumer expectations moved higher and the ISM new orders measure indicated slower contraction.
Other component data for building permits will be released earlier in the week.