Inflation Declines, Unemployment Surges

May 13, 2020

 

Overview: The data released over the past week revealed the massive impact of the coronavirus on the labor market. The Federal Reserve confirmed again that it will do all that it can to support the economy. Mortgage rates ended the week with little change.

The Employment Report released on Friday revealed an unprecedented loss of 20.5 million jobs in April, which was close to the anticipated levels. The unemployment rate spiked from 4.4% to 14.7%, after holding below 4% during all of 2019. Average wages rose significantly, but this was mostly due to the disproportionate loss of lower paying jobs. However, there was a positive buried in the negative: 78% of the people who lost their jobs in April described their layoffs as temporary rather than permanent, meaning they expect to return to their former positions.

 

Slowing economic activity due to the pandemic has dramatically reduced current inflationary pressures. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. In April, core CPI, which excludes the volatile food and energy components, fell 0.4% from March, which was the largest monthly decline ever. Core CPI was only 1.4% higher than a year ago, down from an annual rate of increase of 2.1% last month.

 

On Wednesday, Fed Chair Jerome Powell reiterated that the Fed will do all that it can to support the economy for as long as necessary. He described the importance of preventing short-term problems from becoming permanent issues and suggested that additional government fiscal stimulus programs may be needed. When asked about the possibility of a negative fed funds rate, he responded that "this is not something that we're considering."

 

Week Ahead

Looking ahead, investors will continue watching for news about medical advances to fight the pandemic, Fed actions, government stimulus programs, and plans for gradually reopening the economy. In addition, the Retail Sales report will be released on Friday. Since consumer spending accounts for about 70% of all economic activity in the U.S., the retail sales data is a key indicator of the strength of the economy. The New Residential Construction report (aka Housing Starts) will come out on May 19.

 

Unemployment Rate (%)

 

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