Global Business Activity Starts to Steady, but Recovery Looks Far Off

Date: Thursday, May 21, 2020
Source: The Wall Street Journal

Data show a slower decline in U.S., eurozone and Japan as restrictions begin to ease

U.S. and global business activity and labor markets suffered a little less in May than in prior months, offering signs that damage to the global economy from the coronavirus pandemic is easing but will require an extended time to overcome.

Surveys of purchasing managers showed private-sector activity in the U.S., Europe and Japan fell for the third straight month in May, despite the tentative reopening of many economies around the world.

In the U.S., workers filed another 2.4 million unemployment claims last week, continuing at historically high weekly levels but down significantly from a peak of nearly 7 million at the end of March. The U.S. Labor Department’s report on unemployment benefits also showed the number of people receiving benefits in the week ended May 9—a proxy for overall levels of unemployment—increased to 25.1 million from 22.5 million a week earlier.

The surveys and claims figures pointed to continued job cuts and a rise in unemployment that will likely act as a drag on any recovery as affected households cut back on spending. 

In the U.S., the world’s largest economy, business activity fell at a less steep pace than before. IHS Markit said its index of manufacturing activity stood at 39.8 in May, up from 36.1 in April. A measure of activity in the U.S. services sector—representing the broadest segment of the economy—rose to 36.9 from 26.7. In the eurozone, IHS Markit’s composite Purchasing Managers Index for the eurozone—a measure of activity in the private sector—rose to 30.5 in May from 13.6 in April.

A reading below 50 indicates that activity has fallen, and the lower the figure, the larger the fall.

“Demand is likely to remain extremely weak for a prolonged period, putting further pressure on companies to make more aggressive job cuts,” said Chris Williamson, IHS Markit’s chief business economist. “We therefore expect…a full recovery to take several years.”

The U.S. claims totals exclude hundreds of thousands of self-employed and gig-economy workers receiving unemployment benefits for the first time through a temporary coronavirus-related program. The omission of self-employed workers means the actual number of workers seeking claims has been higher since the federal program called pandemic unemployment assistance, which was included in a stimulus package approved in late March, got under way.

While U.S. layoffs appear to have subsided in recent weeks, the number of people without work continues to remain at record-high levels. As of the beginning of this month, a large share of workers eligible for unemployment benefits were drawing on them in states across the nation, with particularly big parts of the workforces in Nevada, Michigan and Washington state claiming benefits.

Still, the bulk of states saw fewer new applications for unemployment benefits last week, with particularly steep declines occurring in Georgia, New Jersey and Kentucky.

The surveys and claims data suggest many economies are likely to see larger contractions in the three months through June than those recorded in the first quarter, with the path back to levels of output that prevailed in 2019 likely to be dependent on the success of measures designed to contain fresh virus outbreaks and on additional government responses.

On Thursday, the U.S. Senate recessed without reaching a deal to double the amount of time businesses have to spend loans obtained through the Paycheck Protection Program, a key part of U.S. stimulus designed to help keep workers on payrolls during the pandemic. Senators from both parties back the change and plan to take it up after a weeklong Memorial Day break.

The change to the program would extend the time period to 16 weeks, and also must be approved by the House. Under the current rule, the earliest recipients of PPP funds must finish using them by May 29. The bill also would extend the deadline for program applications to Dec. 31 from June 30, and allows businesses to use funds to pay for investments needed to reopen safely and purchase personal protective equipment for employees.

House Democrats are expected next week to bring to the floor a bill to change the $670 billion program’s time frame, and change accessibility requirements. To become law, either bill would have to pass both chambers and be signed by President Trump.

Federal Reserve officials have discussed how to provide more help for an economy facing its greatest shock since World War II. Fed Chairman Jerome Powell on Thursday called it “an economic downturn without modern precedent.”

In addition to continued Fed actions, Mr. Powell has said the U.S. needs to consider more federal aid to businesses and workers to help overcome damage from pandemic disruptions.

The Trump administration has taken a wait-and-see approach, but Treasury Secretary Steven Mnuchin on Thursday at a virtual event hosted by The Hill said there is a “strong likelihood” more will be needed.

Mr. Mnuchin also said Thursday that the downturn will likely bottom out in the second quarter—a view shared by many economists—and predicted a “gigantic increase” in output in the fourth quarter.

In addition to the loan negotiations, lawmakers are also debating whether to extend enhanced unemployment benefits into early next year from the current expiration date at the end of July. Republicans, who control the Senate, have been cool to the idea, though some have offered support for modifying the aid, which, among other things, gives an extra $600 a week in financial benefits to laid-off workers.

JPMorgan sees gross domestic product in the U.S. falling at an annualized rate of 40% in the three months through June, the eurozone tumbling 45%, the U.K. economy contracting by 56.7% and Japan by 35%. Annualized growth figures extrapolate what would happen over a full year if the economy grew or contracted at the same rate as in the quarter being measured.

Some forecasts are for a relatively quick rebound, though the outlook depends on how quickly and thoroughly the novel coronavirus can be contained.

 

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