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From sturdy to crumbling but stimulus should ease damage

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Over the past years, the US economy has showed remarkable signs of improvement, with strong employment and consumer spending which maintained a strong pace and sustained the economy. The unprecedented times of COVID-19 are now a game changer and unarguably the US economy will be negatively impacted. The negative cracks have now started to show with manufacturing indices falling to their weakest levels since 2009.

Out of all the manufacturing indices, the April New York Fed manufacturing index was the hardest hit. The reading was forecasted to come in at -35 which would have been the lowest level ever recorded. Instead, it surpassed that by more than two fold coming in at -78.2 and experienced its largest monthly decline on record in the process. While a net of over three-quarters of the region’s businesses reported declining current conditions, the outlook picked up slightly from last month.

Data was also negative in other segments with new orders, shipments, number of employees, and average workweek all are at record lows and experienced their largest month on month declines on record.

COVID-19 has pushed demand to an absolute free fall. The indices for both new orders and shipments have experienced record declines to touch record lows; surpassing even those from the last recession. More than half of responding businesses have reported that new orders and shipments are weaker.

With activity for most businesses grinding to a halt, it appears focus has shifted from making profits to simply trying to stay afloat by cutting costs and safeguarding liquidity as much as possible. In fact, for the first time since 2009 for capital expenditures and 2013 for technology spending, the Fed indices have tipped negative. Both now stand at -11 indicating fewer companies are looking to expand on capital expenditures or technologies that would benefit operations.

Given recent downturns in data specifically recent jobless claims numbers, the employment side of this month’s New York Fed report wasn’t positive. Straight to the point, 58.6 per cent of responding employers reported smaller workforces while only 3.3 per cent saw an increase in employees.

Additionally, 64.7 per cent of companies reported lower employee workweeks compared to 3.1 per cent with longer workweeks. Those readings for number of employees and average workweeks at -55.3 and -61.6, respectively, are both record lows for current conditions. As for expectations, employers do not appear overly optimistic either.

However, on a more positive tone, the Fed is announcing stimulus packages which are beyond investors’ expectation. Case in point was last week’s massive bond buying programme which will also include lower quality debt. Actions which prove that the Fed will do whatever it takes to safeguard the economy.

Furthermore, fiscal stimulus should also help ease the harsh impact of COVID-19, however recovery periods will be different across sectors.

This article was issued by Maria Fenech, Credit Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.