Fed says pandemic inflicted most ‘severe’ damage on travel sector

Beige Book report on economic conditions shows activity fell sharply in most parts of US

The Federal Reserve said economic activity fell “sharply” in most parts of the US heading into May because of the fallout from Covid-19, hitting sectors ranging from leisure and hospitality to energy and manufacturing.

In its Beige Book, an anecdotal assessment of economic conditions from the regional US reserve banks, the Fed said consumer spending had continued to fall as retailers remained closed because of lockdowns.

“Declines were especially severe in the leisure and hospitality sector, with very little activity at travel and tourism businesses,” the Fed said, relying on data provided up until May 18. “A majority of districts reported sharp drops in manufacturing activity, and production was notably weak in auto, aerospace, and energy-related plants.”

The report comes as the number of Americans out of work continues to rise. The unemployment rate soared to 14.7 per cent in April and it is expected to climb further when data for May is released next week. Since the March lockdowns, almost 39m people have filed jobless claims across the US.

While the Fed has taken a wide range of dramatic steps over the past two months to tackle the economic fallout from the pandemic, central bank officials have recently signalled that they are taking a wait-and-see approach before deciding on any further measures.

After providing more than $3tn to help Americans weather the economic storm unleashed by the pandemic, talks on allocating more money have stalled in Congress as Democrats and Republicans disagree over next steps.

$34.1bn
Value of term-loan defaults in year to date, Fitch Ratings

The pandemic hit corporate America after years of rising share prices, record profits and unprecedented levels of borrowing. As authorities forced businesses to close, global supply chains snapped and consumers reined in their spending. Pressure grew on companies with the most stretched balance sheets.

The credit rating agency Fitch reported this week that the Chapter 11 bankruptcy filing by Hertz, the car rental company, had taken this year’s tally of term-loan defaults to $34.1bn, or more than four times the value at this time last year. It anticipated more corporate pain, projecting that defaults would reach $80bn by the end of this year, and more than $200bn by the end of 2021.

The Beige Book, which is produced eight times year, comes as Donald Trump prepares to face Joe Biden, the presumptive Democratic presidential nominee, in November. The White House is banking on a V-shaped recovery in the third quarter to boost growth as voters are preparing to cast ballots. While some economists believe a sharp recovery is possible, others warn that the improvement will be gradual.

The report, which came seven weeks after the last Beige Book, said auto sales were “substantially lower” than a year ago but that several of the 12 districts had seen “recent improvement”. It said residential home sales “plunged” while construction activity fell in many districts. It added the pandemic had also taken an increasing toll on the agricultural sector.

 “Agricultural conditions worsened, with several districts reporting reduced production capacity at meat-processing plants due to closures and social distancing measures,” the Fed said.

The Fed said the Paycheck Protection Program created by Congress had helped many small businesses avoid firing workers, but that employment “continued to fall sharply in retail and in leisure and hospitality sectors”. It said companies were facing challenges bringing staff back to work, because of health concerns, the difficulty in obtaining child care, and “generous unemployment insurance benefits”.

 “Overall wage pressures were mixed as some firms cut wages while others implemented temporary wage increases for essential staff or to compete with unemployment insurance,” it added. “Most districts noted wage increases in high-demand and essential sectors, while wages were flat or declining in other sectors.”

The Fed said supply chain disruptions combined with high demand had “led to higher prices for some grocery items including meat and fresh fruit”.

The New York Fed reported that the state’s economy continued to contract but that there were “scattered signs of a pick-up in early May”. The Cleveland Fed reported that while many companies believed the worst declines had already passed, “few are expecting a strong recovery”.

The Dallas reserve bank said the pace of decline moderated from April to early May, but oil activity was at “record lows”. The St Louis Fed reported that banks were seeing a “sharp increase in delinquencies”, mainly in mortgages, credit cards, and car loans, but expected fewer delinquencies in the third quarter.

Follow Demetri Sevastopulo on Twitter: @dimi