Despite the pandemic,
U.S. economy may be reawakening

High-frequency data suggests that the economy is beginning to reawaken. Varied measures of business activity including truck loads, mortgage applications, new business applications, flight bookings, hotel reservations and distances traveled seemingly indicate that some parts of the economy are starting to expand once again. Yet those slight improvements, coupled with the continued shutdown of other components of the economy, suggest further struggles ahead.

Initial unemployment claims continued to decline, falling to roughly 2.4 million for the week ended May 16. While the slight decline from the prior week’s 2.7 million claims appears positive, concern is growing that job losses are moving beyond temporary layoffs to more durable losses as the economy (at least temporarily) reorients itself away from goods and services that cannot abide social distancing. Continued claims for the week ended May 9 rose to 25.1 million, the highest on record. Continued claims refer to unemployed people who already filed a claim and who are continuing to receive weekly benefits.

The housing market showed signs of strain in April. Housing starts and building permits declined by 30% and 21%, respectively. Meanwhile existing home sales declined by 18% to their lowest level since April 2011. Although anecdotal evidence suggest that some households are looking to relocate which could spur demand, inventory for sale remains the biggest challenge for home sales. Inventory in April declined 20% on a year-over-year basis, an ominous sign during spring, the prime sales season. The lack of available inventory is supporting home prices, which continued to rise in March at the beginning of the downturn.  

The Fed’s balance sheet continued to expand with assets surpassing $7 trillion for the first time ever, though the pace of growth has generally slowed in recent weeks. The Fed’s minutes from its April meeting showed that the Fed remains concerned about not just the short-term risks to the economy, but also the medium-term risks as well. The Fed will likely continue expanding its balance sheet and implementing additional measures as needed to help blunt the impact of the crisis. 

After passing legislation for record-setting fiscal stimulus, progress on further fiscal policy is slowing if not stalling. Although the Democrat-led House recently passed a roughly $3 trillion spending bill, the Republican-led Senate seems hesitant to the spending package. In recent weeks, a rift over funding to state and local governments emerged which slowed progress. State and local governments face shortfalls in funding due to lower taxes, like the federal government, but some are constrained by the requirement to balance their budgets and a limited ability to borrow in the capital markets.