Fed Beige Book: Economy contracted sharply with virus sweeping across U.S.
The U.S. economy went into a defensive crouch as the coronavirus swept through the country, according to a new report from the Federal Reserve.
“Economic activity contracted sharply and abruptly across all regions in the United States as a result of the Covid-19 pandemic,” the central bank said in its Beige Book survey released Wednesday in Washington. “All districts reported highly uncertain outlooks among business contacts, with most expecting conditions to worsen in the next several months.” The report was based on anecdotal information collected by the Fed’s 12 regional branches through April 6.
Businesses across the country shuttered in March as officials in most states ordered people to shelter in place in an effort to contain the spread of the virus. As many as a quarter of firms in the Philadelphia Fed’s region said they had shut down.
“No sector was spared,” the Philadelphia Fed said in the report.
The hardest hit industries were leisure and hospitality and retail outside of essential-goods purchases, according to the report, prepared by the Boston Fed. While food and medical products producers cited strong demand, they noted production and supply-chain difficulties.
All districts reported employment declines, with many saying they were widespread. Drastic isolation measures have led to millions of job losses and estimates of a second-quarter economic contraction of 25% on an annualized basis. None of the districts reported upward pressures on wages.
“Contacts in several Districts noted they were cutting employment via temporary layoffs and furloughs that they hoped to reverse once business activity resumes,” the Fed said. “The near-term outlook was for more job cuts in coming months.”
In response to the economic slowdown, the Fed has unleashed an unprecedented range of policy tools designed to support households and businesses and to ensure the flow of credit. It cut interest rates to almost zero last month, dramatically increased asset purchases and announced emergency programs to support as much as $2.3 trillion in loans. The Fed’s policy-setting committee is scheduled to hold its next meeting April 28-29.
The manufacturing industry, which reported declines across most of the Fed’s regions, suffered a varied impact from the virus. The San Francisco and Chicago Feds reported a moderate decrease in manufacturing, while Kansas City said it contracted sharply. In the Boston district, 10 of the 11 manufacturing firms the branch bank contacted reported sales that were higher in many cases because of the pandemic.
While the auto industry was mostly shut down, a Boston-region manufacturer of membranes used in N-95 masks said it began producing more for the medical market as its business with the auto industry dried up.
An uncertain future did drive many manufacturers around the country to curb plans for future spending.
“Businesses generally have slashed capital spending plans, with potential implications for some durable goods producers,” New York noted.
Fed districts reported either slowing price growth, unchanged prices or modest to moderate declines in prices, the Fed said. In some areas, virus-related outsize demand did push prices higher.
“In contrast, supply chain disruptions and shifts in the composition of demand led to significant price increases for some essential services -- such as freight -- and some agricultural commodities and consumer goods,” the Fed said.
New York, the nation’s banking capital, said that some lenders are adopting more lenient policies on loan repayments, especially on residential mortgages.
Oil prices have collapsed from the double whammy of a virus-induced steep drop in demand, and the Saudi-Russia price war. Districts with ties to the energy industry reported declines in investment and output, the Fed said. Kansas City, which had seen energy-sector activity slowing before the pandemic, said the drop was exacerbated as oil prices fell below profitable levels.
“Many producers are evaluating which wells need to be shut-in, particularly as physical storage capacity for oil depletes rapidly,” said the Dallas Fed, home to the country’s largest oil field. “Firms said they are unable to access capital through credit markets, prompting concerns about a sharp increase in bankruptcies.”
The coronavirus has infected 2 million people around the world and taken more than 128,000 lives. Cases in the U.S. top 600,000, dwarfing other nations, with outbreaks in major metropolitan areas like New York City, Seattle and Detroit killing thousands and shuttering American life in many regions.