The Federal Reserve is set to meet this week ahead of a key GDP estimate as new data shows recovery in US manufacturing, however surging coronavirus cases threatens the economy’s revival.
The jam-packed week of economic news comes as lawmakers in Washington are debating provisions of another stimulus package to follow up on the $2.2 trillion CARES Act passed in March as COVID-19 hit.
Contracted US economy’s revival under threat by surging pandemic
The business shutdowns caused by the pandemic are expected to see the US economy shrink an unprecedented 35 percent in the April-June quarter when the Commerce Department releases its advance GDP estimate on Thursday.
However some sectors of the economy have begun bouncing back, with retail and new home sales recovering from the coronavirus hit and data from the Commerce Department released Monday showing durable goods orders rising 7.3 percent on demand for transportation equipment.
But in a note, Oxford Economics warned that the prevalence of coronavirus in the US, where more than 55,000 new cases were reported in the 24 hours to Sunday, threatens the gains and chances of the economy’s revival.
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“The sugar rush from re-openings has now faded and a resurgence of domestic coronavirus cases, alongside very weak demand, supply chain disruptions, historically low oil prices and high levels of uncertainty will weigh heavily on business investment,” Oxford said.
Low expectations from scheduled Fed meeting
Amid the durable goods data, transportation equipment grew 20 percent or $9.2 billion, particularly among motor vehicles and parts, where new orders were up 85.7 percent and shipments rose 83.1 percent.
In a sign of Boeing’s continued struggles, new orders for non-defense aircraft slumped -462.3 percent as customers canceled orders with the plane maker.
The Fed will likely take such indicators into account as it begins its two-day Federal Open Market Committee (FOMC) meeting on Tuesday, but few big moves are expected since the committee had already slashed its benchmark lending rate to zero in mid-March.
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If Fed Chair Jerome Powell addresses the surge in COVID-19 cases, he will likely reiterate “that the Fed is prepared if necessary to provide more support to the economy,” said Mickey Levy of Berenberg Capital Markets.
Another possibility is that the Fed might link their movement of the lending rate to inflation, Oxford said.
Inflation jumped 0.6 percent in June but is expected to stay low with COVID-19 hampering consumer demand, particularly with new claims for unemployment benefits still high.
The Labor Department reported nearly 1.42 million claims filed in the week ended July 18.
Historical nosedive for the US economy
Laid-off Americans have benefited from an additional $600 in aid each week under the terms of the CARES Act, but that money is set to expire on Friday, and Democrats and Republicans in Congress are negotiating over possibly extending it.
Analysts expect them to enact more stimulus, but it isn’t clear yet how it will be structured or if the funds will be approved before the emergency unemployment benefits run out.
The crash in GDP in the second quarter is expected to be the worst in years for the world’s largest economy, but the damage will be somewhat stemmed by a recovery in goods and services in May, ahead of a bounceback in the months to come, IHS Markit said in an analysis.
“Our forecast of 18.2 percent growth in the third quarter reflects continued (but slowing) recovery in services GDP and a partial reversal in goods GDP of gains exhibited over May and June,” they said.
On top of the data releases will be a slew of earnings reports by large American firms, including tech leaders Apple, Amazon, Facebook and Google, as well as McDonald’s, Exxon Mobil and Boeing.
AFP with additional input by GVS News Desk