Newsletter: Has the Economy Bottomed Out?

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U.S. consumer prices are falling, U.K. GDP is contracting, budget deficits are skyrocketing and yet there are signs we may be hitting bottom. Jeff Sparshott here with the latest on the economy.

How Low Can You Go?

The coronavirus pandemic pushed down U.S. April consumer prices by the most since the last recession. The big headline drop was led by plummeting gasoline prices, a development that doesn’t help Americans when they’re not driving. Households are buying more at grocery stores, and the price index for food at home posted its largest monthly increase since February 1974. Outside of food and energy, core prices saw the largest monthly drop in records dating to 1957. Efforts to contain the pathogen disrupted demand for travel, clothing and other goods and services.

What happens next? It seems the U.S. is on a disinflationary path for now. Worst cases: A sudden turn to outright deflation—when businesses and workers are forced to accept lower prices and wages—or a farther-off surge in inflation triggered by low interest rates and massive government spending.

Where do you think inflation is heading? Let us know by replying to this email.

WHAT TO WATCH TODAY

The U.S. producer-price index for April is expected to fall 0.5% from the prior month. (8:30 a.m. ET)

Fed Chairman Jerome Powell speaks on economic issues at 9 a.m. ET. Webcast here. 

The WSJ’s monthly survey of economists is out at 10 a.m. ET.

Fed Vice Chairman Randal Quarles joins a virtual discussion on supervision and regulation. A video recording will be made available on the House Financial Services Committee website after the roundtable’s conclusion.

TOP STORIES

Don’t Look Back in Anger

The U.K. economy shrank less than its peers in the first quarter of the year, reflecting the country’s decision to hold off locking down its economy until the end of March. Gross domestic product shrank an annualized 7.7% on the quarter. By comparison, France’s economy shrank 21% during the same period, Spain’s economy shrank 19% and Italy’s 17%. However, the U.K. didn’t lock down its economy until March 23. That means the worst of the economic hit is still to come. The Bank of England expects GDP to contract by a quarter in the second three months of the year, Jason Douglas and Paul Hannon report.

Forever In Your Debt

The U.S. federal budget deficit soared to a record $1.935 trillion in the 12 months through April as the U.S. ramped up spending and revenue dropped. The budget gap has begun a rapid expansion that the Congressional Budget Office projects will leave it at $3.7 trillion by Sept. 30, the end of the fiscal year, Paul Kiernan reports.

Millions of Americans have asked for a break on their debt payments to weather the coronavirus shutdown. Their lenders are having a hard time keeping up. Borrowers seeking debt relief are encountering jammed phone lines, overflowing inboxes and stretched-thin customer-service departments, AnnaMaria Andriotis reports.

Mixed Messages

President Trump has backed Tesla Chief Executive Elon Musk’s decision to resume production of cars at its California plant, siding with the electric-vehicle maker over the local government in a high-profile standoff.

Some governors sought more help from Washington as they moved to restart their economies and new clusters of coronavirus infections cropped up in parts of the Middle East and Asia after authorities loosened lockdowns.

Top Trump administration health officials emphasized the need for caution and widespread testing while easing coronavirus lockdowns, warning in a Senate hearing that serious risks would continue into the fall as schools looked to reopen.

“If certain areas prematurely open up, my concern is we might see spikes that turn into outbreaks.” —Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases

‘At the Bottom and Headed Up’

Federal Reserve Bank of Richmond President Thomas Barkin said the U.S. economy is probably at its lowest point in the coronavirus crisis. “I think we are at the bottom and headed up,” Mr. Barkin tells the WSJ’s Michael S. Derby. “The real issue here is, what’s the rate of recovery? We’ll obviously have a difficult second quarter, I think we’ll obviously have some bounce in the third in the fourth quarter. And the question is just how high and how fast.”

Official economic data is lagging the economy’s actual performance. March trade deficit? Ancient history. April job losses? Old news. Private, real-time indicators suggest Mr. Barkin is onto something. Job site Indeed, for example, shows the number of job postings as of last week was 39% lower than 2019. Bad, but actually a slight improvement from a week earlier.

Dining out has staged a faint comeback in states that are more aggressive about reopening.

Small businesses appear to be cautiously reopening.

Americans are staying away from public transit, but they’re out driving and walking more.

Obviously, activity is far from normal. And not all indicators suggest the economy is improving, even slowly. The New York Fed’s Weekly Economic Index aggregates 10 high-frequency time series. Most recently, it found modest recoveries in retail sales, consumer confidence and steel production, but that was outweighed by overwhelmingly bleak data from previous weeks.

WHAT ELSE WE’RE READING

The World Trade Organization should be abolished. “We must face facts. The only sure way to confront the single greatest threat to American security in the 21st century, Chinese imperialism, is to rebuild the U.S. economy and to build up the American worker. And that means reforming the global economic system. Abandoning the WTO is a start,” Sen. Josh Hawley (R., Mo.) writes in the New York Times.

The new coronavirus is stoking new pressure for protectionism. “If the trend is left unchecked, the world may repeat the experience of the 1930s, when industrial production fell by nearly 40%, unemployment soared, and economic activity remained anemic for the better part of a decade. Then as now, trade barriers did not cause the problems,” Chad Bown, a senior fellow at the Peterson Institute for International Economics, writes in Foreign Affairs.

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