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1Q20 real GDP fell 5.0% q/q at a seasonally adjusted annual rate, marking the start of a sharp recession. Last week, data continued to rebound off of April lows, with the ISM manufacturing PMI reentering expansionary territory at 52.6 in June, while Markit mfg. PMI was just shy of neutral at 49.8. Consumer confidence rose more than expected to 98.1. This supports our forecasts of a significant 2Q plunge (-35% annualized) followed by 3Q bounce (+20%), with much slower growth thereafter.
Nonfarm payrolls increased by 4.8 million in June, pushing the unemployment rate down to 11.1%, with gains driven by leisure and hospitality, retail, and education and health care. The labor force participation rate rose to 61.5%. Wages fell -1.2% m/m for all workers and -0.9% m/m for production and non-supervisory workers, up 5.0% y/y and 5.4% y/y, respectively, due to job gains among lower wage earners. Although many returned to work with the reopening of the economy, the sharp resurgence in COVID-19 cases and pauses in reopenings could slow the pace of recovery going forward.
With 478 companies having reported (97.6% of market cap), our current estimate for 1Q20 earnings is $19.96, with EPS growth declining -47.5% y/y. Revenues and margins have dragged on profit growth but buybacks have provided a minimal positive contribution. The halt in economic activity in March is the primary cause of the earnings slide, although oil prices, which were down 16% on average during the quarter, also contributed to earnings weakness. Financials, energy, industrials and consumer discretionary had the sharpest declines in earnings, while info. tech, consumer staples and real estate produced positive growth.
May headline and core PCE rose 0.1% m/m, rising 0.5% and 1.0% y/y, respectively. Headline and core CPI both fell 0.1% m/m in May, rising just 0.2% and 1.2% y/y, respectively. The decline in energy prices and growth puts downward pressure on inflation in the short term, although monetary and fiscal support should push it up in the medium term.
The FOMC maintained the federal funds target rate at a range of 0.00%–0.25%. The median federal funds rate projection—as measured by the “dot plot”—implies no rate adjustments over the forecast period, and all 17 FOMC participants anticipate no further changes in 2020 or 2021. In its economic projections, real GDP is expected to fall 6.5% y/y in 4Q, with the unemployment rate at 9.3% at year-end. The FOMC did not provide much additional clarity on other tools, but will continue with asset purchases to support market functionality and financial conditions, and offer capacity in its facilities, which have only been tapped modestly thus far.