Coronavirus woes plague New York ISM and factory orders

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Economic indicators released Monday showed the continued impact of COVID-19 on the economy, as the Institute for Supply Management-New York's current conditions index fell to a new low of 4.3 in April, while March and factory orders plunged 10.3%.

The New York metropolitan area current business conditions index fell to 4.3 in April, from the previous month's record low of 12.9. The six-month outlook also set a record nadir at 26.4 in April, down from 37.9 in March.

The six-month outlook has been a reliable short-run guide for current business conditions, ISM-NY said. The employment index hit a 10-year-plus low, of 29.2 in April, off from 36.7 in March. The prior low was 26.3 in June 2009.

Quantity of purchases fell to a record low 8.3 from 32.7 in March. Current revenues fell 17.7 points to 10.9.

Expected revenues decreased 15.6 points to 23.3. The prices paid index moved the least for the second month in a row, edging down 1.8 points from the breakeven level of 50.0 in March to 48.2 in April.

Factory orders slump
Factory orders plunged 10.3% in March, the fourth decline in five months, the Commerce Department said Monday.

Economists polled by IFR Markets expected a slightly smaller 9.8% decrease.

Commerce noted many businesses have shut or are running at a reduced capacity as a result of the COVID-19 pandemic, in part explaining the huge dropoff.

In February, orders fell 0.5%.

Unfilled orders, declined 2.0% in March, after three straight monthly gains, including a 0.1% rise in February.

The unfilled orders-to-shipments ratio slid to 6.57 in March from 6.62 in February. Inventories fell 0.8% after a 0.4% decline in February. The inventories-to-shipments ratio grew to 1.46 from 1.40 in February.

Financial crises are not random
Financial crises are not random, as they are "usually preceded by a prolonged buildup of macrofinancial imbalance," according to Pascal Paul, an economist in the economic research department of the Federal Reserve Bank of San Francisco and Joseph H. Pedtke, a PhD student in economics at the University of Minnesota and a former research associate in the Bank's economic research department.

Their research suggests the presence of “early-warning indicators for crises beyond the credit and asset price measures that policymakers typically consider when evaluating systemic risk. The findings also provide guidance for assessing macroeconomic models that include financial crises that researchers can use for policy analysis.”

Rising income inequality and low productivity growth may predict both the onset and severity of financial crises, they note in the Economic Letter.

Paul and Pedtke discovered long-run historical data offers guidance policymakers can use to understand conditions that precede crises.

“Leading up to the Great Recession, the U.S. economy experienced a massive expansion of credit, which likely contributed to an unusual buildup of financial instability,” according to the authors. “However, a range of other macroeconomic developments occurred at the same time as the credit boom. Two notable macroeconomic forces before the onset of the crisis were a rapid rise in top income inequality, as measured by the share of income that goes to the top 10% of the income distribution, and a collapse of economy-wide indicators of productivity growth."

Both of these pre-crisis trends may have contributed to the buildup of financial fragility that led to the crisis, and may help explain the slow recovery that followed.

"Because financial crises are infrequent events that occur around every 25 years in advanced economies, a long-run historical approach is helpful for examining the conditions that lead up to such events," they said.

Paul and Pedtke used various statistical models to test whether changes in top income inequality or productivity growth can predict a financial crisis in an upcoming year.

"The analysis suggests that such developments are indeed statistically strong early-warning indicators of financial crises," they said. "These results hold true even after accounting for changes in other macrofinancial conditions and regardless of various modifications of the baseline statistical model. Hence, this historical evidence tells us that financial crises typically occur out of environments of rising income inequality and low productivity growth.”

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