BA Boeing Co

By Harriet Torry 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 18, 2020).

WASHINGTON -- American shoppers reined in their spending last month and factory production was broadly flat, signs the economy began to strain as the threat from the new coronavirus started to take hold.

The Commerce Department's reading on retail sales in February showed they declined by a seasonally adjusted 0.5%, falling well short of expectations and suggesting coronavirus concerns dented consumers' appetite for spending on purchases like vehicles and electronics.

While some of the retail-sales decline was attributable to a drop in gasoline prices, overall weakness suggests consumers began to pull back on spending last month as the coronavirus outbreak spread within U.S. borders.

Meanwhile, the Federal Reserve said Tuesday that manufacturing production edged up 0.1% in February as disruptions at Boeing Co. continued to hold down overall factory output.

Tuesday's reports encompassed a month in which coronavirus began to spread within the U.S., although the number of cases remained relatively low. Since last month, financial markets have plummeted and consumers have begun to self-isolate amid a widening coronavirus pandemic -- factors that are likely to hit the economy hard in the months ahead.

S&P Global Ratings chief economist Beth Ann Bovino said in a note Tuesday she expects gross domestic product to contract at a 1% seasonally adjusted annual rate in the first quarter and shrink 6% in the second, "signaling recession for the U.S."

Overall industrial production, a measure of factory, mining and utility output, increased a seasonally adjusted 0.6% in February from the prior month, the Federal Reserve said, as utility output rose strongly due to cold weather.

"With strict measures restraining social activities now in place to contain the coronavirus outbreak, consumer spending is poised for a severe pullback in coming months," Gregory Daco of Oxford Economics said in a note to clients, adding "disruptions from the coronavirus will bring the economy's main engine to a halt."

In a negative sign for the already hard-hit hospitality industry, Americans reined in spending on dining out, as sales at bars and restaurants dropped 0.5% in February. Sales at clothing, building material, grocery and health stores also dropped. One bright spot was nonstore retailers, a category that includes internet merchants such as Amazon.com Inc., which rose 0.7% as consumers shunned malls and brick-and-mortar stores.

As February began, the U.S. had reported only seven coronavirus cases and started imposing entry restrictions on foreign nationals and quarantines on Americans returning from the Chinese province at the center of the virus outbreak. By the end of February, there were 64 confirmed cases in the U.S., and airlines were suspending flights. The number of confirmed cases has now risen above 4,600, with 85 deaths.

Overall, economists say the outlook for consumer spending is negative due to the coronavirus outbreak. Consumer spending is the main driver of the U.S. economy, accounting for more than two-thirds of economic output.

"The March [retail sales] figures are going to be off-the-charts bad, and the April results may not show much of a rebound, depending on how long the more extreme social distancing steps remain in place," Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a note to clients.

Grocers, drugstores and mass merchants that sell food and household staples such as Walmart Inc. and Target Inc. have said they plan to stay open but many clothing and mall-based chains have announced temporary closures. Over the weekend, Apple Inc. and Nike, which are big drivers of foot traffic, said they would shut their U.S. stores for two weeks. The list of retail closings has expanded by the day to include chains such as Nordstrom Inc., Foot Locker Inc., Williams Sonoma Inc. and J.Crew Group Inc. Even those that are staying open, such as Kohl's Corp. and J.C. Penney Co., said they would reduce hours this month.

"There is clearly a tremendous amount of volatility and therefore, uncertainty around the coronavirus situation," Timothy Baxter, chief executive officer of fashion retailer Express Inc. said during an earnings call last Wednesday.

Recreational Equipment Inc. said Sunday it would close all 162 retail stores for nearly two weeks due to the coronavirus outbreak, although customers can still shop online. REI said it would continue to pay store employees during the temporary store closures.

The coronavirus outbreak is also hitting smaller business operators. Dante Hill, a chef in Austin, Texas, said the cancellation of the South by Southwest festival means "70% of my work for the next two weeks is gone."

"I work with several companies in Austin and this has hit everyone, some to the tune of several hundred thousand dollars," he said. "People are even beginning to cancel funerals."

Outside the U.S., the cost of containing the novel coronavirus is weighing on a European economy that had already slowed as 2019 drew to a close. Figures released by the European Union's statistics agency Tuesday added to a picture of weakening momentum, showing that wages across the eurozone rose at the weakest pace in 18 months during the final quarter.

Little data is as yet available on the impact of the containment measures, but expectations have deteriorated rapidly. A survey of German financial analysts conducted by the ZEW-Leibniz Centre for European Economic Research in Mannheim recorded the sharpest decline in economic sentiment from one month to the next since it began in December 1991.

"The economy is on red alert," said Achim Wambach, the ZEW's president.

Mr. Wambach said the surveyed analysts expect Germany's economy to contract in the first quarter, and possibly also in the second. Over the year as a whole, they see gross domestic product falling by 1%.

Businesses across Europe have started to fire workers, despite a wave of government measures designed to contain the rise in unemployment. Official jobless figures aren't yet available for February, but a U.K. estimate of people claiming out-of-work benefits suggested the rise may have been modest. The Office for National Statistics said 17,300 additional people claimed help in the three months through February compared with the three months through January, bringing the total to 1.25 million.

--Paul Hannon and Amara Omeokwe contributed to this article.

Write to Harriet Torry at harriet.torry@wsj.com

(END) Dow Jones Newswires

March 18, 2020 02:47 ET (06:47 GMT)

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