The RSM Monthly Index of Economic Activity is pointing toward negative real GDP growth for the first time since the Great Recession of 2008-9.
The RSM monthly index has been pushed over the edge by what could be a seminal shift in the labor market and a structural break in the economy.
Our index of underlying economic activity – which has been in decline since August 2018 as the global economy suffered through a trade war and a manufacturing slowdown – has been pushed over the edge by what could be a seminal shift in the labor market and a structural break in the economy brought on by the outbreak of the coronavirus.
Our model, which captures data in near real time, understates the true monthly decline in real gross domestic product. While monthly and quarterly GDP are negative through the first three months of the year, the magnitude of that decline, at least on a quarterly basis, will most likely be greater than 10% because of the effects linked to shelter-in-place policies ordered to mitigate the spread of the Covid-19 virus.
As the figure below illustrates, the RSM monthly index has been negative only during recessionary periods: July 2001 to April 2002, and September 2008 to February 2010. And the index was last below 1% growth during the 2015-16 mini-recession brought on by the oil glut and commodity price drop.
Like the unprecedented surge in initial claims for unemployment benefits, the drop in the growth rate of hours worked confirms that employers have reduced the need for labor, much less overtime. We expect that trend to continue for as long as it takes to protect the labor force from the spread of the disease and as ramifications of the pandemic lead to more automation and a reduction in staffing needs.
The 6.2% yearly drop in retail sales reported in March allows us to forecast decreases in wholesale activity, manufacturing sales and inventory buildups for March and beyond.
Household expenditures kept real GDP growth afloat during the trade war, but the shutdown of normal consumption patterns during the coronavirus outbreak has the potential to bring that to an end. And just as the Great Recession was the impetus for off-shoring manufacturing, we could expect major changes in retailing that will leave commercial real estate staggering, while the drop in income and the loss of wealth during the crisis will undoubtedly have a sobering effect on major consumer expenditures on durables in the coming months and quarters.
NowCasts of first-quarter growth
Our monthly model of economic activity is calling for average growth of 0.9% during the first three months of 2020 on a year-over-year basis. By comparison, and after reports of negative real personal consumption expenditures and negative private investment, the Atlanta Fed’s GDPNow forecast was reduced from 1% growth to an estimate of “-0.3% for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2020.”
The latest New York Fed staff NowCast, from April 10, was for 1.5% in the first quarter and minus 0.4% in the second quarter.
Please check the banks’ latest forecasts as new reports arrive throughout the quarter.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.