The United States economy is powered primarily by consumers opening their wallets and shelling out for things, which accounts for roughly two-thirds of growth. So when retail sales register an historically awful plunge, the case for a long and painful recession grows stronger.
That is what happened on Friday. The US Commerce Department reported that retail and food service sales in April posted their biggest decline on record, plummeting 16.4 percent from the previous month, and 21.6 percent from the same period a year earlier.
The nation’s factories also took it on the chin. The US Federal Reserve said on Friday that total industrial production fell 11.2 percent in April – the largest monthly drop in the 101-year history of the index – while factory output collapsed 13.7 percent – also the worst ever recorded.
Friday’s reports add to a mounting body of evidence that the US economy is in the throes of an epic downturn triggered by coronavirus lockdowns that have shuttered businesses and thrown more than 36 million Americans out of work since March.
To get an idea of the scale of the carnage – in February, the US unemployment rate was hovering near a 50-year low at 3.5 percent. In April, it skyrocketed to 14.7 percent. That month alone, more than 20 million Americans lost their jobs.
While cities and states across the country are starting to ease stay-at-home orders, and some businesses are slowly stirring back to life, the economy has a long way to go to recapture its pre-pandemic strength.
“The coronavirus-induced recession has caused significant damage to the economy that the easing of social distancing measures alone won’t fix,” said Oxford Economics lead US economist Oren Kachkin in a note to clients. “We forecast that industrial output losses will not be recovered until late-2021.”
Key to getting the economy back on track is getting consumers spending again. But with many economists forecasting an unemployment rate still in double digits by year’s end, that could take some time.
“While we believe the worst of the consumer retrenchment is likely behind us, the gradual relaxation of lockdowns and lingering virus fear will translate into a slow release of purse strings,” said Oxford Economics senior US economist Lydia Boussour in a note to clients. “In addition, the combination of elevated unemployment, depressed income, frail consumer confidence will continue to weigh on consumers’ appetite for spending.”
The University of Michigan Consumer Sentiment Index released on Friday registered a slight improvement in May – an uptick chief economist Richard Curtin credited to virus relief cheques that improved consumers’ finances, as well as widespread price discounting boosting buying attitudes.
But other economists were not convinced.
Capital Economics chief US economist Paul Ashworth expressed doubt “that those $1,200 cheques made all the difference when so many are out of work,” adding: “It’s possible that the survey has been distorted by non-responses – but that should be less of an issue in this type of phone-based survey.”
Earlier this week, Federal Reserve Chairman Jerome Powell warned that the US could be facing a protracted period of weakness and said more government spending may be necessary to avoid long-term economic damage.