Economy: 'You don't want to look, but you know you have to'

A woman wearing a protective mask walks past a closed children's clothing store in the Hispanic, Little Village in Chicago, Wednesday, April 15, 2020. The first U.S. economic indicators to capture the devastation brought on by the pandemic have begun to arrive, showing a plunge in retail sales exceeding what happened during the economic crisis a decade ago. (AP Photo/Charles Rex Arbogast)

The Associated Press

Evidence of virus' effect on US economy grows more ominous

Christopher Rugaber and Anne D'Innocenzio 

AP Business Writers

WASHINGTON (AP) — Evidence of the coronavirus' devastating impact on the U.S. economy has been steadily emerging, and the signs have grown ominous. 

Sales at stores and restaurants plunged in March by the largest amount on records dating back to 1992. The nation's industrial output fell by the largest amount since the end of World War II. And the outbreak keeps ravaging the global oil market.

That was just Wednesday's news.

"I've never seen anything like this," said Jennifer Lee, senior economist at BMO Capital Markets. "You don't want to look, but you know you have to." 

The picture will likely worsen in the coming weeks and months. Retail sales — a primary driver of the U.S. economy — are almost surely suffering further during April because business shutdowns will have been in effect for the entire month, compared with just half of March.

Sales of homes and cars will also keep declining. And economists have forecast that Thursday's weekly report on applications for unemployment benefits will show that millions of Americans sought jobless aid last week, on top of the record-high of nearly 17 million who filed in the previous three weeks.

Economists now project a record-shattering 40 percent annual decline in U.S. economic output for the April-June quarter. While growth is expected to rebound in the second half of the year, economists at JPMorgan Chase have forecast that the U.S. economy will still shrink 7 percent for 2020 as a whole.

The slowdown will be global. The International Monetary Fund on Tuesday predicted that the world economy would shrink 3 percent this year, the worst outcome since the Great Depression.

That is hammering oil prices, threatening the solvency of many oil drillers and putting many of their employees out of work. Global demand for oil will fall this year by the most ever due to economic lockdowns around the world, the International Energy Agency said Wednesday. Demand will drop an estimated 9.3 million barrels a day, which is equivalent to a decade's worth of growth.

In the U.S., consumer spending drives more than two-thirds of the economy and was one of the main pillars of support before the virus. Business investment in new plants and equipment had already pulled back in the face of the U.S.-China trade war and falling oil prices. 

On Wednesday, the government said U.S. retail sales plummeted 8.7 percent in March, an unprecedented decline, as the outbreak brought most commerce to a halt.

The deterioration of sales far outpaced the previous record decline of 3.9 percent that took place during the depths of the Great Recession in November 2008. Auto sales dropped 25.6 percent, while clothing store sales collapsed, sliding 50.5 percent. Restaurants and bars reported a nearly 27 percent fall in revenue.

Spending may be falling at an even faster pace than the retail sales figures suggest. Wednesday's report did not include spending on services such as hotel stays, airline tickets or movie theaters.

Also Wednesday, the U.S. reported that industrial production, which includes manufacturing, mines and utilities, posted the biggest drop in March since 1946.

Manufacturing output dropped 6.3 percent last month, led by plunging production at auto factories that have shut down. Output dropped 3.9 percent at utilities and 2 percent at mines as oil and gas drilling plunged.

And builder confidence in the market for new single-family homes has fallen off a cliff, according to an index released Wednesday by the National Association of Home Builders and Wells Fargo. Their monthly housing market index plunged 42 points in April to a reading of 30, the largest single monthly change in the history of the index.

Retail sales represent about one-third of consumer spending, with the rest consisting of services. But the damage to the sector has broader ramifications for the economy.

The retail industry supports 1 out of 4 jobs in the U.S., according to some estimates. That includes millions of jobs like delivery workers, tailors, vendors who supply hangers to store fixtures, and construction workers charged with renovating or building new stores.

"A lot of the economy is driven by the consumer," said Neil Saunders, managing dierctor of GlobalData Retail, a research firm. "The consumer is the linchpin. If the consumer takes a tumble, the rest of the economy falls down." 

Stockpiling of essentials is starting to wane, Saunders said, which will also lower retail sales in April, and more grocery stores are limiting the number of shoppers in their locations. Walmart, the nation's largest retailer, is now allowing no more than five customers for each 1,000 square feet at a given time. That will reduce their stores' capacity by about 80 percent.

The pullback in spending intensifies the problems facing brick-and-mortar retailers, which were already struggling with online competition. 

With a nationwide shutdown of malls and most stores, the pandemic is putting many clothing retailers in peril, while increasing the dominance of big box stores that have remained open during the pandemic because they sell essentials like food and household goods.

More than 250,000 stores, including Macy's, Nordstrom and Nike, which sell nonessential merchandise, have been shuttered since mid-March. That's 60 percent of overall U.S. retail square footage, Saunders said.

Major retailers including J.C. Penney, Macy's and Nordstrom have furloughed hundreds of thousands of workers, while Walmart and Amazon are on hiring sprees to try to meet the surging demand of shoppers buying online or for curbside drop-off or delivery.

Department stores and mall-based chains have cut executive pay and suspended cash dividends and stock buybacks or repurchases to preserve cash. They're also drawing down their credit lines to make sure they have a bigger pile of cash on hand.

A global economic pandemic

Economic pain from the coronavirus pandemic spread even more widely Thursday, weighing heavily on nations, businesses and ordinary people as countries struggled to restore confidence that stores, factories, airplanes and schools could reopen safely.

In France, Amazon suspended operations altogether after a court ruled it wasn't doing enough to protect its workers in the country. The online retailer, which has six warehouses in France, said it would evaluate the court decision. 

"We are facing unprecedented disruptions," said Allard Castelein, the port CEO, adding that he expects the situation to get worse.

The International Monetary Fund says fallout from what it calls the "Great Lockdown" will be the most devastating since the Great Depression in the 1930s.

Still, leaders are anxious to send people back to work and school and to rebuild economies devastated by the pandemic that has infected more than 2 million people and claimed more than 137,000 lives, according to a tally by Johns Hopkins University.

Yet in China and the handful of countries in Europe that have partially reopened their economies, even people who still have jobs are wary of spending much or going out. In nearly empty stores and streets, people eye each other from a distance, their faces covered by masks. 

Some Chinese cities tried reassuring consumers by showing officials eating in restaurants. In Zhengzhou, Zhang Hu in is back at work but his income plummeted because few are buying the 20-ton trucks he sells. 

"I have no idea when the situation will turn better," he said.

The U.S. began issuing one-time payments this week to tens of millions of people as part of its $2.2 trillion coronavirus relief package. But another part of the relief package, a $350 billion paycheck protection program aimed at small businesses, is running dry after being open for only a matter of days. Negotiations were accelerating in Washington over a $250 billion emergency request to help.

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