Economic Activity Picks Up

June 3, 2020

 

Overview: The data released over the past week revealed an unprecedented decline in economic activity resulting from the pandemic, but also indicated that recovery has already begun. Mortgage markets have been relatively quiet, and rates again ended the week with little change.

Following growth of 2.1% in the fourth quarter of 2019, gross domestic product (GDP), the broadest measure of economic activity, fell 5.0% in Q1 2020, which was the weakest reading since 2008. As bad as that was, however, it does not even come close to the expected decline for the second quarter. The Federal Reserve publishes an estimate of GDP growth, which it updates every few days based on the most recent data. On Tuesday, the Fed projected that GDP will fall over 50% during the second quarter, which is roughly in line with Wall Street forecasts. After that, early estimates from economists for the second half of the year predict sizable gains.

 

Despite the Fed and Wall Street’s dire predictions, the more recent results have shown clear signs of a rebound. Two of the most significant reports released each month, which reflect the most current economic activity, are from the Institute of Supply Management (ISM). The May ISM Services Index rose more than expected to 45.4 from a reading of 41.8 in April. Similarly, the ISM Manufacturing Index increased to 43.1 from 41.5 in April.

 

The reduced economic activity resulting from the pandemic has caused a decline in inflation, which has helped keep mortgage rates low. In April, the core Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Fed, was just 1.0% higher than a year ago, down from an annual rate of increase of 1.7% last month. Fed officials have stated that their target level for annual inflation is 2.0%.

 

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 reopening the economy. In addition, the monthly Employment Report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. The next Fed meeting will take place on June 10, and investors will be looking for guidance about the magnitude of additional monetary stimulus.

 

ISM Services Index

 

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