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The economy improved over the last month, but it is clear that momentum is slowing and future growth will likely be more difficult to come by.
In the United States, the rate of new COVID-19 cases has slowed somewhat, which has likely helped to reduce some uncertainty. Manufacturing sentiment moved higher again, and the outlook for new orders and production remains solid. Consumers also appear somewhat less concerned about the year ahead, though expectations remain half as favorable as they did at the start of the year. Consumer sentiment in the United States has ebbed around April’s lull but remains above the lows experienced during the last recession. However, other uncertainties remain, and business and consumer sentiment could slip in the coming months. In the United States, the outcome of November’s election will increasingly weigh on sentiment, and uncertainties around another stimulus bill will influence businesses’ investment decisions and Americans’ spending habits. Retail sales in August slowed as the end of CARES Act cash payments and pandemic unemployment payments created a headwind for consumer spending. At the same time, many areas of retail sales are above pre-pandemic levels calling into question how far retail sales can go when, employment remains depressed and purchasing power has been curtailed.
In Europe, countries began to relax their stay-at-home orders in earnest. Businesses began to reopen as consumers worked toward a new normal. But rising cases of COVID-19 could dampen the recovery. France, for example, recently reported its highest daily increase of infections since the pandemic began in mid-February.
The Organization for Economic Co-operation and Development (OECD) recently “raised” its outlook for the global economy for 2020. The OECD now says the world economy shrank by 4.5 percent, up from its June forecast of a 6 percent decline. While the economy is doing better than anticipated, it isn’t great. Only China will see positive growth in 2020 among the G20 countries.
Economies are extremely fragile right now, and any policy blunders will stymie the recovery. In the United States, there has been talk of additional fiscal stimulus but little movement forward. On the monetary front, the Federal Reserve remains committed to accommodative policy for several years, and interest rates are expected to stay near zero at least through 2023. The European Central Bank (ECB) recently announced it was leaving its policy programs unchanged, but many expect the entity will expand its bond purchase stimulus.
There is also growing concern that the expiration of some policy measures might push the economy back into contraction. In the United States, the expiration of eviction moratoriums will create a headwind. In Europe, the expiration of short-time work benefits could drive layoffs and increase the unemployment rate. Other policy measures will be dictated by economic realities yet to materialize. For example, weakness in the dollar will create a challenge for Europe in the coming year. The Euro continues to strengthen against the dollar, which will support U.S. exports but will likely hurt European exports at a time when manufacturers are working to move operating rates higher.
In both the United States and Europe, manufacturing has recovered a significant portion of ground lost to the pandemic, but most sectors remain below prepandemic levels. While manufacturing is expanding, manufacturers remain cautious. New orders and production are expanding on both continents, and backlogs are growing. This, in turn, is keeping prices firm, but manufacturers are not expanding employment, and inventories remain lean. Capital investment is likely to remain in check. Demand is anything but certain, and manufacturers are responding to an uncertain environment by trying to keep costs contained.
The initial recovery brought strong growth rates almost across the board as the economies reopened; however, as growth slows, we are likely to see a divergence in across sectors. The electronics industry continues to appear to have weathered the pandemic most favorably. Production is up in recent months and positive on a year-over-year basis in both the United States and Europe.
While downstream markets for electronics have been recovering, many are showing signs of slowing growth. The automotive industry was especially hard hit by the pandemic but recovered swiftly. Some of the pandemic-induced, pent-up demand has cleared, and now the auto industry is showing signs of a slowdown. In the last month, auto production declined from July. Sectors of the economy will likely feel a divergence in recovery as growth slows and some areas of the economy recover more fully than others.
Read the full report at ipc.org.