We Need A Nationwide Shutdown

PMI Composite FLASH

If you read this report last month, you had an early warning sign that the economy was rolling over rapidly, as IHS Markit’s FLASH Composite Purchasing Managers’ Index collapsed just days after the stock market achieved new all-time highs. This was the first economic report for February to reflect that the coronavirus was starting to impact economic activity. Output in February for the service sector contracted for the first time since 2013, with the Composite falling below 50.

The number of cases in the US had risen, but no one was paying attention. I asserted then that our rate of economic growth would be crimped by 1% in the first half of this year, provided the virus was contained. If not, then we would have a far more serious situation.

The severity of the situation was reflected in this month’s FLASH Composite PMI, which fell to a reading of 40.5 in March from 49.6 in February. The service sector collapsed to just 39.1. It looks like we will be falling to levels that will be below those of 2009, as an increasing number of states enact 30-day shelter-in-place orders.

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New Home Sales

New homes sales remained robust in February, declining 4.4% to an annual rate of 765,000 from an upwardly revised 800,000 in January, but still showing the second-best number since July 2007. That will change in March when sales are likely to plunge, but the pent-up demand will be significant when we overcome the spread of the virus. Mortgage rates will be at all-time lows, supporting a rapid recovery for this sector of the economy, provided the recession is over before the end of the year.

Durable Goods Orders

Orders increased 1.2% in February, but when we exclude transportation, orders fell 0.6%. That’s discouraging because these numbers have yet to be impacted by the growing shutdowns across the country. Orders for non-defense capital goods excluding aircraft, otherwise known as capital spending, declined 0.8%, and the shipment of these goods that is used to calculate GDP fell 0.7%. Next month is going to be a disaster. We just don’t know how big of one yet.

Unemployment Claims

I never discuss the claims number in this report, because it has never been a relevant statistic. It would have been if we had seen anything other than a steady decline in the number. That all changed in last week’s historic rise of 3,283,000. Claims could soar to 10 million in coming weeks. The good news here is that benefits will be significantly increased for recipients during this time of crisis. My only concern is that a record number of claimants will overwhelm the state agencies that manage the process, and many people in need of money won’t have it when they need it.

Personal Income and Spending

Personal income rose a better-than-expected 0.6% in February and spending rose 0.2%. Personal income is up 4% over the past year, while spending has increased 4.9%. The Personal Consumption Expenditures Price Index, which is the Fed’s preferred measure of inflation, rose 0.1%, while the core rate (excluding food and energy) rose 0.2%. The core rate is now up 1.8% over the past year. All these numbers tell us now is how the economy was positioned before the coming collapse in economic activity.

Conclusion

The most important number in my economic outlook moving forward is the one you see below. Until the number of active cases peaks and starts to decline, I fear that stock prices will continue their downtrend and the recession will deepen. As I have said from the start, the only way to contain this pandemic is a nationwide shutdown. The longer it takes to happen, the deeper the recession will be and the longer it will last.

The Portfolio Architect was defensively positioned at the beginning of this year in anticipation of the bear market that has come to pass, but were you? Most pundits were riding the bull as the market hit all-time highs, while we were heavy in cash, but now that fear is reaching extremes, opportunities abound. Join us as we look to slowly position for the next bull market run.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The Portfolio Architect is published as an information service. Lawrence Fuller, the publisher, is also the Managing Director of Fuller Asset Management, a Registered Investment Advisor, which is unaffiliated with this Marketplace service. While this service includes opinions about buying, selling and holding a wide range of securities, the publisher is not acting as an investment adviser or providing advice or recommendations to any particular subscriber. Any investment recommended should be made only after consulting with your investment advisor or completing your own due diligence. There are risks involved with investing including loss of principal. Mr. Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals or the strategies discussed by will be met.

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