Limited functionality available
What’s happening this week in economics? Deloitte’s team of economists examines news and trends from around the world.
Learn how to combat COVID-19 with resilience
Listen to the 2020 economic outlook podcast
Go straight to smart. Get the Deloitte Insights app
View previous weekly updates
Visit the Deloitte Insights economics collection
China’s economy continued to improve in October as evidenced by the latest flurry of data from the government. Here are the details.
Retail sales increased 4.3% in October versus a year earlier, the fastest rate of growth since December of last year. Several categories grew at a breakneck speed, reflecting a significant rebound in consumer demand. These included automobiles (up 12.0%), garments (up 12.2%), personal care products (up 11.7%), cosmetics (up 18.3%), jewelry (up 16.7%), and telecoms (up 8.1%). Sales of oil and oil-based products were down sharply. The surge in cosmetics, jewelry, and garments suggests that people are becoming more mobile and, consequently, are more concerned about their appearance.
Industrial production was up 6.9% in October versus a year earlier. This was the same rate of growth as in September that had been the fastest since December of last year. The manufacturing component was up 7.5%. By category, production of machinery was up 17.6% while production of general equipment was up 13.1%). This bodes well for investment as well as exports.
Speaking of investment, the government reported that fixed asset investment in the first 10 months of 2020 was up 1.8% from a year earlier. Investment by the public (state) sector increased 4.9% while investment by the private sector fell 0.7%. Thus, the shift toward a more state-focused economy continues. Investment in real estate was up 6.3%.
Also, inbound foreign direct investment (FDI) in the first 10 months of the year was up 6.4% from a year earlier. This included a 16.2% increase in FDI in the services sector and a 27.8% increase in FDI in the high-tech sector. In October alone, inbound FDI was up 18.3%. Thus, despite US efforts to stymie Chinese access to foreign capital, especially in high technology, China continues to gain in this area.
Finally, although China has benefitted from its ability to suppress the virus almost fully, enabling a robust economic recovery, it is evident that Chinese consumers are not fully enjoying the fruits of this recovery given a paucity of income gains. Specifically. Real disposable household income grew 6.0% from 2018 to 2019. Yet in the first nine months of 2020, real disposable household income increased only 0.6% from a year earlier. This suggests modest wage increases. Employment took a big hit early in the year, but many jobs have returned, especially as the government provided employers with exemptions from paying social insurance costs. Hiring has picked up speed, and there are reports that wages are rising in key industries that have benefitted from strong external demand. Still, the weakness in wage gains could hamper economic growth in the coming year.
In the third quarter, Japan’s economy rebounded nicely after a devastating decline in the second quarter and after three consecutive quarters of declining real GDP. Specifically, after real GDP fell at an annualized rate of 28.8% in the second quarter, it increased at an annualized rate of 21.4% in the third quarter. Still, this means that the economy recovered only 56% of what was lost in the second quarter, rendering real GDP 14% below the level in the first quarter. In other words, Japan has some way to go before restoring the economy to a precrisis level.
Meanwhile, Japan also reported that, in September, industrial production was up 3.9% from the previous month but was down 9.0% from a year earlier. The biggest gain came from motor vehicle production, which was up 11.4% from a month earlier. In addition, production of machinery was up 11.3%. These categories likely benefitted from a revival of global demand for durable goods and capital goods, especially in China.
Japanese exports continued to decline in October, but at the slowest pace in roughly two years. This is consistent with other data showing Japanese economic activity beginning to stabilize after a prolonged period of decline. Specifically, exports were down 0.2% in October versus a year earlier. The stabilization was largely driven by strong exports to the United States and China, offset by declining exports to Europe. Exports to the United States were up 2.5% from a year earlier, while exports to China were up a strong 10.2%. Both were driven by strong demand for Japanese automobiles. However, exports to Europe were down 2.6% from a year earlier, perhaps a reflection of the return of economic restrictions in Europe in response to the surge in the virus. Meanwhile, Japanese imports fell 13.3% in October versus a year earlier. This was led by a sharp decline in the value of oil imports, which reflected much lower energy prices than a year ago. In addition, imports of aerospace equipment fell sharply as airlines slowed the purchase of planes.
Despite not having had a major outbreak of the virus and despite not having experienced severe economic restrictions, Japan’s economy has had a rough time during the pandemic. There were two reasons. First, exports cratered as global demand suffered and as supply chains were disrupted. Second, Japanese consumers took strong precautions in the face of the virus. They limited their social interaction in ways that suppressed spending on services. The good news is that, in the third quarter, exports rebounded nicely, likely due in part to the revival of China’s economy and China’s supply chains. In addition, Japanese consumer spending also revived, in part due to government subsidies for expenditures on durable goods. Also, government subsidies boosted spending on travel.
Going forward, there is concern that the current surge of the virus in Europe and North America will have a negative impact on Japanese exports in the fourth quarter. In addition, although Japan’s outbreak is not as severe as Europe’s and North America’s, Japan is currently experiencing yet another surge. This could have a further negative impact on consumer spending that is already weak. Thus, despite the strong headline number for the third quarter, Japan’s economy remains relatively subdued with significant downside risks in the coming months.
Meanwhile, Japan has returned to deflation. Specifically, consumer prices were down 0.4% in October versus a year earlier, the lowest rate of inflation since 2016. Moreover, when volatile food and energy prices are excluded, core prices were down 0.7%, the lowest rate of inflation since 2011. This comes despite an unusually easy monetary policy on the part of the Bank of Japan, which says it is determined to boost inflation to 2.0%—a goal not met in a very long time. The economy remains weak and consumer demand is poor. Plus, Japan is now facing another serious outbreak of the virus, although the number of infections per capita remains far below what is happening in Europe or the United States. It is likely that the outbreak will further suppress consumer interaction, thereby hurting spending. In addition, if the government imposes new economic restrictions in response to the pandemic, hurt demand could be hurt and inflation suppressed. The problem with deflation is that it discourages spending and increases real (inflation-adjusted) borrowing costs.
Michael Wolf, a global economist with DTTL, writes about the potential troubles facing US consumers and their creditors when forbearance programs expire at the end of the year.
The US CARES Act provided substantial support to the US economy early in the pandemic. In addition to stimulus checks and expanded unemployment benefits, federally backed mortgages and student loans were put into forbearance for affected borrowers. The Federal Reserve encouraged other lenders to provide accommodation to borrowers as well. Forbearance and accommodation programs freed up cash flow for many households, which helped put a floor under consumer spending. Unfortunately, the official forbearance programs are set to expire by the end of the year, and other financial accommodation may go away as well. Such a scenario could adversely affect consumer spending and harm bank balance sheets as the economy struggles amid its third wave of the pandemic.
Student loan forbearance has had a sizable effect on consumer finances. About US$888 billion of student loans were put into forbearance in Q3, putting 19 million fewer loans in repayment. Given that the Federal Reserve estimates that the typical monthly payment for student loan service in 2019 was between US$200 and US$300, the forbearance plan likely saved borrowers between US$3.8 billion to US$5.7 billion every month. At the upper limit, that is equivalent to 0.5% of all monthly consumer spending in Q3. This suggests that the expiration of student loan forbearance alone could erase up to 0.5% from spending. Of course, should the forbearance program expire at the end of the year, borrowers may have the option of entering repayment programs that could substantially lower their monthly payments relative to what they paid before the pandemic.
The mortgage forbearance program did not likely have such a substantial effect. The current economic crisis has disproportionately fallen on low-income households, which are less likely to have a mortgage. Still, the strain on households in the pandemic has been clear. Corelogic, a real estate data analytics company, includes forborne loans in its mortgage delinquency rate, which was 6.6% in August, up 2.9 percentage points from a year earlier. If we assume this increase is entirely due to forbearance programs, then the monthly savings, and potential losses, would total a little over US$2 billion.1 That is roughly equivalent to between 0.1% and 0.2% of monthly consumer expenditures in Q3.2 However, these delinquency rates only cover mortgages where a payment was missed entirely and do not account for partial repayments. The US Census Bureau’s Household Pulse Survey shows that 9.5% of mortgage holders were not caught up on their mortgage payments during the last two weeks of August. Plus, that number increased to 10.1% by the two weeks ending November 9, indicating that more homeowners are struggling as the pandemic worsens, and that the magnitude of economic losses may be worse than expected should mortgage forbearance end.
Perhaps more worrying is the overall financial strain on consumers who do not have a student loan or a mortgage, which is 71% of households living in low-income neighborhoods. Although not explicitly covered in the CARES Act, many of these households have been able to secure some accommodation from their lenders and landlords. According to an October survey from Transunion, a credit bureau, 9% of renters had received an accommodation. However, the Census Household Pulse Survey shows that 18.3% of renters were not caught up on their rent during the two weeks ending November 9. Numerous state and local governments had implemented eviction moratoria and rental assistance programs earlier this year, but many of those programs have already ended.
Landlords are not the only ones who relaxed repayment restrictions. The Transunion survey shows that 21% of personal loans, 16% of auto loans, and 14% of credit cards had some kind of financial accommodation by the end of October. Although it is difficult to ascertain what these numbers looked like prior to the pandemic, it is clear that without such accommodation, household balance sheets would take a sizable hit. Plus, of the 60% of respondents who were financially affected by the pandemic, 38% already said they may not be able to pay their credit card bill, 24% may not make their car payment, and 22% may not pay their personal loan.
A hit to consumer spending is not the only ramification of the end of forbearance and financial accommodation. Banks could face much larger credit losses as households reprioritize their payments once accommodation ends. Fitch Ratings, a credit rating agency, has left most banks with a negative outlook, as it expects more nonperforming loans and charge-offs to occur next year. This comes at a time when the largest US banks have reduced their provisioning for future losses. S&P Global Ratings, another credit rating agency, reported that bank allowances for loan losses in the first half of this year were mostly insufficient to absorb the losses they expect.
Forbearance programs and financial accommodation have supported the US economy this year and provided a lifeline to numerous households. If Congress passes additional stimulus and households continue to receive financial support, it could prevent further economic deterioration next year. With a viable vaccine on the horizon, the additional accommodation need not last much longer.
When fiscal stimulus expired in the United States at the end of July, there was a widespread expectation that it would lead to a sharp decline in consumer spending. This did not happen. Rather, although personal income fell sharply in August, consumer spending only decelerated. Then in September, retail sales performed quite well. Many Americans continued to spend, dipping into their savings and borrowing more. Still, many analysts expected that, eventually, absent more government support for troubled households, spending would take a hit. Then, in October, the number of infections started to soar, leading to fears that, aside from the human cost of the pandemic, there would also be a further economic cost. That is, there was an expectation that, fearful of the virus, millions of consumers would stay home and avoid social interaction, thereby suppressing economic activity. Now we have learned that, in October, retail sales decelerated sharply. What we don’t know with certainty is why this happened. Is it because consumers finally responded to the expiration of stimulus? Or was it due to the negative impact of the new surge in infections? Perhaps it was both. In any event, here are the details.
In October, retail sales increased only 0.3% from September. This followed a 1.6% gain in the previous month. The October increase was the worst performance since the catastrophic decline that took place in April at the start of the crisis. Moreover, as the virus continues to soar and as many state and local government now implement new economic restrictions, it is reasonable to expect that retail sales will perform even worse in November. If so, the fourth quarter of 2020 could experience either very slow or even negative growth of real GDP.
Most categories of retail spending saw a significant deceleration or decline in October versus September. Some, however, increased as people spent money in ways that reinforced their isolation. Thus, while spending at apparel stores fell 4.2% after having increased sharply in September), spending at electronics stores increased 1.2% (after having declined in September). In addition, spending at non-store retailers increased by a strong 3.1% after having declined in September. Notably, spending at restaurants as well as grocery stores declined. Despite the strength of the housing market, spending at furniture stores declined. Still, spending at home improvement retailers increased a strong 0.9%. And spending at automotive dealerships decelerated dramatically, rising only 0.4% in October after having increased 2.9% in September.
Overall, the report on US retail sales suggests that the expiration of stimulus and/or the surge in the virus have now taken a toll on the economy. The incoming Biden administration has indicated that its first priorities will be virus suppression and fiscal stimulus. Both are clearly needed in order to prevent a larger economic crisis.
Pfizer and BioNTech announced a test of a potential vaccine for COVID-19 that has been 90% successful. Pfizer said it can produce 10 to 15 million doses by yearend. This sent share prices soaring, especially for Pfizer but also for airline, hotel, and aerospace companies. Shares in food delivery services and home improvement retailers fell. Bond yields increased on expectations that economic growth and inflation could soon accelerate. Meanwhile, even if this vaccine and others turn out to be successful, it will take time to produce on a mass scale, distribute, and deliver. There will be issues regarding who obtains the virus first, both by age, risk factor, income, ethnicity, and geography. There is still plenty of work to be done before we can breathe easily.
What economic impact can we expect from a successful vaccine? The reaction of equity markets suggests an answer. The surge in shares of airlines means that investors expect people to once again engage in social interaction, especially people in business. If that happens, we could see a surge in demand for consumer-facing services such as restaurants, live entertainment, travel, and retail stores. This could be followed by a renewal of hiring in these industries that are currently operating well below capacity. The result could be a temporary acceleration in economic growth as major economies return to precrisis levels of activity. It could also be a temporary surge in inflation. However, central banks have adequate tools to reverse their largesse and avoid ruinous inflation.
In the United States, President-elect Biden has indicated that virus suppression will be his first order of business, especially at a time when the virus appears to be spiraling out of control. The number of new daily infections in the United States is now about twice the last peak reached during the summer. The number of daily deaths is now at the highest level since August. Public health officials are warning that we have not yet seen the worst. Biden announced the appointment of an advisory committee on COVID-19 and offered a seven-point program for fighting the virus. His plan envisions free testing for all citizens, enhanced guidance to state and local governments for virus suppression, more spending on medical equipment for medical workers, use of Federal government powers to mandate more production of medical equipment, and a nationwide mask mandate. He hopes to implement this plan upon taking office in late January. Meanwhile, he said that “the single most important thing we can do” to suppress the virus is to wear a mask. He noted that “a mask is not a political statement.”
Biden intends to shift the focus of how COVID-19–related federal funds are allocated. Specifically, the Biden team wants to divert some funds from vaccine research toward improving testing. They noted that about 40% of all infections in the United States happen to asymptomatic people, most of them young. Unless such people are tested, it is nearly impossible to decide who should be isolated and therefore difficult to stifle the spread of the virus. Currently, testing in the United States is not easily available unless someone is symptomatic. Moreover, test results often take several days to get back. The Biden team wants testing to be more widely available and the results to be available almost immediately. The team believes that this could go a long way toward suppressing the spread of the virus.
The US election is over. Joe Biden will be the next president. The result is now largely accepted by the press, business leaders, foreign leaders, and others. What will the election outcome mean for government policy going forward? The answer is that it depends on the outcome of Senate elections which will determine which party controls the Senate. Currently, we know that the Democrats control 48 seats and Republicans will control 50 seats in the 100-seat Senate. Two seats are yet to be determined. The general consensus is that Republicans have a better chance of holding all four, but there is some uncertainty. The Democrats need two of those seats to gain control while the Republicans need three. The most likely scenario is a Democratic president and a Republican Senate. This means little likelihood of passing many of the ambitious domestic plans offered by candidate Biden. It means a more scaled-back fiscal stimulus.
On the other hand, it is reported that Biden intends to issue some initial executive orders that will shift the direction and tone of the Federal government. These include rescinding the restrictive immigration and refugee policies of the current administration, rejoining the Paris Accords on climate, rejoining the World Health Organization, allowing transgender people to serve in the military, and allowing government workers to join unions. Other potential actions might include reducing tariffs, changing rules regarding cross-border investment, and changing environmental rules that affect the automotive and energy industries. On the other hand, there are many legislative actions that the Biden campaign had proposed that are not likely to happen if there is a divided government. These include raising the federal minimum wage, expanding the Affordable Care Act, spending more money and imposing new regulations related to climate, reforming law enforcement in order to address systemic racism, raising taxes on upper-income households, and increasing the corporate tax rate. Another proposal is to spend heavily on infrastructure investment. This might have a chance given that there are some Republicans who favor this kind of expenditure.
Meanwhile, a divided government will likely lead Mr. Biden to be more focused on tasks a president can undertake without Congressional support. These include carrying out foreign policy, ordering the use of military force or changes in military deployment, and implementing changes in policy related to trade and cross-border investment. These are areas that Biden is well-prepared to do having spent decades on the Senate Foreign Relations Committee (some of which were as chairman) and having played a significant role in the foreign policy of the Obama administration.
Biden is likely to face resistance to his policies on two fronts. First, some Republicans could follow a scorched earth policy meant to disrupt the success of the new administration. This would be especially true if Donald Trump continues to have an influential role in the party. Second, Biden will likely face trouble from the left flank of his own party. Already, there have been grumblings that Biden might be too much of a centrist, that he might choose technocratic centrists rather than those with ideological purity, and that he might even appoint Republicans to his administration. Biden has counseled compromise and respect for opponents. This attitude does not resonate with many people in both parties.
Biden’s supporters had hoped for a clear mandate in the form of a landslide election. This did not happen. Still, the presidential election was not nearly as close as it has been portrayed. Biden won the election, carrying more than 78 million votes and obtaining the largest share of the vote of any challenger to an incumbent since 1932. He got the third-highest share of the overall vote of a Democrat since 1944 and the highest share of the population of any candidate ever. Thus, although the result was closer than anticipated by pollsters, it was not actually close in terms of the number of votes cast. As for the more important electoral college, all major news organizations now predict that he will obtain 306 electoral votes compared to the 270 needed to win. This is the same number that Donald Trump received in 2016. On the other hand, Democrats made no gains in Congress, having lost seats in the House and at this time gaining only one in the Senate. Thus, the status quo nearly held. Yet it held as Americans voted in larger numbers as a share of the electorate than any time in the last century. Biden got the most votes ever achieved by a presidential candidate while Trump got the second most. Citizens were clearly engaged.
Mike Wolf, a global economist with DTTL, provides the latest on the virus and its economic impact in Europe and the United States:
The pandemic has worsened significantly throughout most of Europe and the United States. Confirmed cases have reached new highs and most countries have implemented more lockdown restrictions to limit the spread. As Europe and the United States struggle with their second and third waves of infections respectively, the economic recovery may be going into reverse.
Of the five largest economies in Europe, France is experiencing the worst outbreak even after infection rates came down slightly from their November 8 high. As a result, France closed non-essential stores at the end of October. Mobility near retail and recreation establishments plummeted 58% from its prepandemic level in the first eight days of November, which was almost 38 percentage points lower than October’s average.
In Germany, Italy, Spain, and the United Kingdom, mobility was between 30–40% below prepandemic levels for the first eight days of November. The decline in mobility over the last two months has been much steeper for Germany and Italy where the number of newly confirmed cases has yet to fully plateau or decline. In Spain, the declines in mobility were less severe over the same period, which is likely due to a more gradual rise in infection rates since the summer and the fact that rates began to trend slightly lower over the last week. The decline in mobility in the United Kingdom was also less severe through the end of October for similar reasons. However, UK mobility fell nearly 15 percentage points between November 4 and November 8 as harsh lockdown restrictions went into place.
Mobility in Europe is strongly correlated with purchasing managers’ indices (PMIs) for the service sector. Except for the United Kingdom, these PMIs were already below 50 in October, indicating that the sector was contracting. If mobility remains as subdued for the rest of November as it has been for the first eight days of the month, then we will likely see much lower service PMIs and thus a harsher contraction in services. Such a scenario raises the probability of GDP falling this quarter.
By contrast, in the United States, where population-adjusted new cases are higher than they are for Europe as a whole, mobility was down just 17% from its prepandemic levels in the first week of November. This is about where mobility has been since June, suggesting Americans are no longer adjusting their behavior based on the ebbs and flows of the virus like they did earlier in the year. At the same time, the PMI for US services continued to trend higher over this period, indicating a strengthening expansion in the service sector. However, consumer spending data showed service-related expenditure growth moderated in September, and consumer confidence remained well below prepandemic levels in October. Major US cities and states are beginning to implement local lockdown restrictions, which may ultimately reduce mobility further and lead to another contraction in economic activity there as well.
Other high-frequency data tell a similar story. Box office sales in France fell nearly 100% in the last weekend of October. That same weekend in Germany, which has a lower infection rate than the other large European economies, marked the highest box office sales in two months. In the UK, sales held up through the end of October before plummeting 99% the weekend of November 7. Seated restaurant diners in Germany and the United Kingdom were down 97% and 90%, respectively on November 12. The United States continues to stand out here. Weekend box office sales in the United States have been consistent since the beginning of September, and seated restaurant diners were down by 52%, which has been about the same since August. So far, there are few signs of the US economy contracting despite the rapid rise in new cases. This increases the likelihood of further transmission of the virus.
European economies are contracting quickly, particularly in the vulnerable service sectors. Many lockdown measures will remain in place until December. Should infection rates come down quickly and allow for a reopening, some economic activity could resume in December, helping to blunt the declines in November. Since mobility and spending are holding up better so far in the United States, a contraction may not come until later this year or in Q1 2021.
China’s exports continue to grow strongly. In October, exports (denominated in US dollars) were up 11.4% from a year earlier, faster than the 9.9% growth recorded in September. This was the fastest export growth in more than a year and a half. Imports were up 4.7%, which means that China’s trade surplus continues to expand. Interestingly, the bilateral surplus with the United States is up more than 46% since US President Trump took office. Although economists know that bilateral trade imbalances are meaningless, the current US administration has made a big fuss about the size of that imbalance and promised to reduce the US deficit with China. Instead, the opposite happened. In any event, the strength of China’s exports comes at a time when global demand remains relatively weak. Thus, China’s export strength signifies the continuing competitiveness of Chinese industries. Notably, China’s exports have been especially supported by strong global demand for medical equipment as well as technologies related to remote working and shopping. Thus, Chinese industries have benefitted from pandemic-related trends. That said, the surge in infections in Europe and the United States suggests the possibility of a further slowdown in demand. This, in turn, could have a negative impact on Chinese exports.
China’s export strength was largely related to demand in the United States. Exports to the United States were up 22.5% in October versus a year earlier while exports to the European Union were down 7.0%. Exports to Southeast Asia were up 7.0%. Interestingly, Chinese imports from the United States were up 33.0%. This was likely related to China’s pledge to boost imports from the United States as part of the so-called “phase-one” trade deal signed in January. Strong Chinese demand for US goods will set the stage for whatever policy shifts President-elect Biden intends to implement. If he chooses to ease trade restrictions, the fact that Chinese demand is already strong could allay the concerns of those critical of trade with China.
Also, Chinese imports from Europe were up strongly. Specifically, Chinese imports from Germany were up 24% in October versus a year earlier and imports from Italy were up 21%. This is a boon to the European economy which is otherwise facing significant headwinds from the resurgence of the virus. Moreover, this happened at the same time that European Union (EU) exports to the United States and United Kingdom were down. The result is that China has now surpassed the United States as the European Union’s leading trading partner. Thus, at a time when the European continent is suffering from the effects of new lockdowns and weak demand in the United States and United Kingdom, China is providing a much-needed boost. It stems from the fact that China’s economy is growing more rapidly than any other major economy having successfully suppressed the virus.
I’m often asked by clients how it is possible that the US government can perpetually run large budget deficits. They note that if their companies did this, they would quickly go out of business. The answer is that governments are not companies. Governments have monopoly power to create money and monopoly power to tax people and business. As such, they can issue safe debt to a degree that companies cannot. Moreover, governments cannot go out of business. The only dangers from debt issuance that a government can face are higher borrowing costs and/or higher inflation. Interestingly, in the current crisis, borrowing costs and inflation have both declined in advanced economies. If you believe that markets know best, then you likely believe that the rise in debt is sustainable. Why?
There are a few reasons. First, the surge in borrowing is expected to be temporary. That is, it will last while the crisis lasts, but not longer. Second, the government is not competing with the private sector for scarce funds. Thus, bond yields are not being driven up. Third, much of the extra debt is being purchased by the Federal Reserve, thereby boosting the money supply. Yet this has not led to an increase in expectations of inflation. That is because much of the extra money is being hoarded by businesses and consumers. Moreover, it is expected that, should that money be spent thereby creating inflationary pressures, the Fed will likely reverse what it has done. Finally, it is likely that the precrisis large deficits will continue in the post ̶ COVID-19 world. However, if borrowing costs remain low, the debt service payments-to-GDP ratio should be stable and the debt-to-GDP ratio will stabilize. Indeed, even though latter ratio has increased, the debt servicing-to-GDP ratio has not.
Does this mean that Modern Monetary Theory, with its notion that there is no limit to debt-funded government spending, is correct? Not at all. Rather, it means that the United States and other governments can sustainably borrow a great deal. But a great deal is much less than infinity. There is a theoretical limit beyond which the United States would face severely higher borrowing costs, higher inflation, a much lower dollar, and much slower economic growth. The good news is that we’re not there yet. The implication is that the United States can avoid ruinous austerity when the crisis is over. The implication also is that the best way to avoid disaster is to get the virus under control, thereby setting the stage for fiscal policy to revert to normal.
The global economy now faces considerable downside risk owing to the surge in infections in both Europe and the United States. This has the potential to significantly curtail activity in consumer-facing industries. However, the manufacturing sector appears to be doing very well despite the outbreak. The latest Purchasing Managers’ Indices (PMIs) from IHS Markit signal faster growth of activity in manufacturing, driven by rising demand for consumer durable goods and, in some countries, stronger external trade. The PMIs are forward-looking indicators meant to signal the direction of activity in the manufacturing sector. They are based on sub-indices such as output, new orders, export orders, employment, input and output prices, inventories, pipelines, and sentiment. A reading above 50 indicates growing activity; the higher the number, the faster the growth—and vice versa. Early in the crisis, PMIs declined catastrophically as supply chains were disrupted and demand softened dramatically. Yet now, even as infections in Europe and the United States soar to levels above what happened early in the year, the manufacturing sector appears to be coping, with demand remaining firm and supply chains not severely disrupted.
Here are the details. Markit’s global manufacturing PMI hit 53.0 in October, a 29-month high and an indication of moderate growth in activity. With the exception of Japan, every major industrial nation had a PMI above 50, indicating growing activity. Even in the case of Japan, the PMI improved from September to October. For the global PMI, the strongest sub-indices were output, new orders, and future expectations. The weakest ones were export orders, employment, and output prices. Thus, the industry has benefitted from strong current and anticipated domestic demand in each country as well as investor expectations for the future. The industry faces a challenge stemming from weak global trade, although there were improvements in some countries, such as Germany and Japan. Moreover, hiring is limited by fears that additional workers will not necessarily be needed. Plus, businesses are likely engaged in more automation.
By country, the PMI for the United States hit 53.4, the highest in nearly two years and an indication of moderate growth. While output and new orders were strong, export orders fell. Thus, the disruption to global trade continues to undermine the strength of the manufacturing sector. In nearby Canada, the PMI fell slightly in October but remained high at 55.5. In Europe, the Eurozone PMI hit 54.8, the highest in 27 months and a level indicating strong growth of activity. The star performer in Europe was Germany with a PMI of 58.2, the highest in 31 months and a level indicating very strong growth. Germany benefitted from strong export orders, especially from China. The PMIs were considerably lower in other European countries, hitting 51.3 in France, 53.8 in Italy (a 31-month high), and 52.5 in Spain. In the United Kingdom, the PMI hit 53.7, a slight decline from the prior month.
In Asia, India’s PMI soared, despite an otherwise bleak economic environment. The PMI hit 58.9, the highest in more than a decade. Moreover, output was up at the fastest pace in 12 years and export orders were the best in six years. The relaxation of COVID-19 restrictions and increased business confidence played a big role in the improvement in the PMI. Meanwhile, China’s PMI hit 53.6, a level indicating moderate growth in activity; this was the highest reading since January 2011. That being said, export orders weakened and were only marginally positive. Evidently trade tensions have hurt China’s manufacturing sector. Additionally, Japan’s PMI remained below 50, hitting 48.7 in October, the best since January of this year. It appears that Japan’s manufacturing sector is close to stabilizing after a period of decline. Export orders were up, signaling the continued competitiveness of Japanese manufacturing and, possibly, the positive impact of a strong Chinese economy. Finally, the PMIs for Taiwan and South Korea remained in positive territory in October.
The global services industry continues to grow as the global economy recovers and as people become more accustomed to dealing with the existence of the virus. However, services activity in Europe weakened in October as the virus spiraled out of control. Now, with governments across Europe imposing economic restrictions, such activity is likely to decline further. Meanwhile, services activity in the United States performed well in October despite a growing outbreak, one that consumers and state governments largely ignored.
These conclusions are based on the latest PMIs that provide a forward-looking view about activity in the broad services sector. Services encompasses retail, wholesale, travel and leisure, finance, telecoms, professional services, transportation, distribution, education, and health care. The global services PMI published by IHS Markit hit 52.9 in October, the highest in 19 months. This partly reflected rising output in the United States, China, United Kingdom, and India. Output fell in the Eurozone and Japan. Consumer services remained relatively weak while financial and business services were stronger.
The PMI for services in the United States rose to 56.9, the highest in nearly two years and a level indicating rapid growth of activity. Evidently the expiration of stimulus has not yet taken the toll that many observers anticipated. In the United Kingdom, the PMI fell sharply from 56.1 in September to 51.4 in October. This likely reflects the negative impact of the rising level of infections. Meanwhile, the British government has imposed a severe lockdown that is likely to suppress services activity in the coming month. On the European continent, the PMI for the Eurozone fell to 46.9, a level indicating significant decline in activity. The PMI for services fell in all four major Eurozone economies, but they fell the most in Spain, which is where the latest outbreak began. Finally, the PMIs for services in both India and China increased in October to levels indicating significant growth of activity. Asia continues to be the strongest regional economy in the world.
The US government released its jobs reports for the month of October. The headlines note strong job growth and a sharp decline in the unemployment rate. This is one way to interpret the data. However, job growth was the slowest since the crisis began. At the current rate of job growth, it would take another 16 months for overall employment to return to the level just prior to the crisis. Moreover, although the number of unemployed has fallen, the number of long-term unemployed has risen sharply. Thus, it is a mixed picture. Plus, the latest report comes at a time when the virus is getting far worse, with the number of new daily infections now far above the level seen early in this crisis. Experience tells us that a worsening of the virus has negative consequences for consumer interaction and spending and, consequently, employment.
In any event, the US government releases two reports—one based on a survey of establishments, the other on a survey of households. Let’s begin with the establishment survey. It indicates that 638,000 jobs were created in October, a huge number by any standard. Still, it was the smallest increase since the crisis began, suggesting that the job market is decelerating. This is consistent with other indicators of weakening. At the same time, there was a 138,000 decline in Federal government employment due to the dismissal of temporary census counters. Thus, private sector employment grew somewhat faster. Meanwhile, more than 97% of the total increase was attributable to just four categories of employment: construction, retail, restaurants and hotels, and professional and business services. These categories account for about 38% of total employment. To some extent, the growth reflected the return of jobs that had been lost due to the need for social distancing. There was a sharp decline in employment at state and local governments and only modest job growth in most other categories. Also, average hourly earnings were up 4.5% from a year earlier. This relatively large number mainly reflects the fact that the mix of jobs is currently very different than a year ago when many more low-wage retail and restaurant workers were employed. After all, there are 9.2 million fewer jobs now than a year ago, and most of the decline was in low-wage professions. Nearly 30% of the year’s loss was in restaurants and hotels.
The separate survey of households told a more positive story. It found that, while the working-age population was up 183,000 in October, the labor force was up 724,000 as many discouraged workers reentered the workforce. The result was a sharp increase in the labor force participation rate—although it remains far below the level from a year earlier. The number of people reported to be employed soared, causing the unemployment rate to drop from 7.9% in September to 6.9% in October, the lowest level since the crisis began. The household survey includes people who are self-employed. The rate of youth unemployment fell especially sharply.
Although the household survey found that the number of people classified as unemployed (seeking but not finding work) fell by 1.5 million, the number of people reported to be unemployed for six months or longer increased by 1.2 million. This implies that, even as temporarily unemployed workers in retail and restaurants returned to their old jobs, many people in these and other industries are finding themselves permanently unemployed due to the permanent shutdown or downsizing of key businesses. For example, airlines and aerospace companies have announced large permanent job dismissals.
Going forward, the path of employment will depend on the path of the virus and the fiscal policy of the US government. Incoming President-elect Biden may face a Republican Senate. This suggests the possibility of gridlock. Thus, although some kind of stimulus is likely, it will probably be smaller than if one party controlled the White House and both houses of Congress.
When the United States and China signed a so-called “phase-one” trade agreement in January, the hope was that Chinese imports from the United States would soar, thus addressing the concerns of the US government and avoiding new US tariffs. Then came the pandemic and Chinese imports fell, although they eventually rebounded. Still, even now, Chinese imports from the United States are 16% lower than three years ago. Thus, it appears that the pandemic has prevented the kind of surge that the United States sought. But is the pandemic the true culprit? This question is important because Chinese imports from the rest of the world are up 20% from three years ago. Thus, China’s trade with the world has, indeed, surged, just not with the United States. As such, it is reasonable to conclude that the trade war and the fraught economic and political relations between the United States and China are largely to blame for the collapse of bilateral trade, not simply the pandemic.
With the United States presidential election having been concluded, this raises the question as to what kind of trade policy the country will implement over the next four years and what impact it might have. Incoming President-elect Biden is likely to pursue a more nuanced trade policy than President Trump. That is, he will not likely do a full reversal, especially given the unpopularity of China at the moment and the protectionist instincts of the left flank of his party. However, Biden has said he will reconsider the tariffs already implemented. In his long career, he has been a strong supporter of easing relations with China in particular and of globalization in general. Moreover, Biden and China’s president are very well acquainted, having had numerous meetings during the Obama administration.
Meanwhile, much of the US business community favors easing tensions with China. Many US companies sell goods and services in the Chinese market while others rely on Chinese supply chains. China has encouraged more US investment and US financial institutions especially have continued to pour money into China. Business leaders can make the case that trade restrictions have hurt their domestic employment by reducing trade and investment. The US president will surely hear from them.