Fed: Sharp economic decline in May leaves businesses ‘pessimistic’ about recovery

Economic activity “sharply” declined across the U.S. through May, leaving businesses “highly uncertain” about their futures and “pessimistic about the potential pace of recovery,” according to a Federal Reserve report released Wednesday.

The Fed’s May “Beige Book” — a monthly compilation of business activity reports from each of the system’s 12 districts — painted a dire picture of the economic toll of the coronavirus pandemic as states began to gradually lift restrictions imposed to slow the spread of COVID-19.

The Fed reported a deep, nationwide plunge in consumer spending, manufacturing activity, travel and construction due to disruptions driven by the pandemic, sending shockwaves through the energy, real estate, auto, aerospace and agricultural industries. 

While banks reported strong demand for emergency Small Business Administration (SBA) loans, a sharp drop in residential home sales and evaporating revenue from missed commercial real estate rent payments pose other threats to the financial sector. 

The widespread cratering of the U.S. economy drove staggering job losses in each Fed district, according to the report, depressing wages in almost every industry outside of those deemed essential. The unemployment rate spiked to 14.7 percent in April as the U.S. lost 20.5 million jobs that month, according to the Labor Department, and is expected to rise toward 20 percent in May.

Businesses that were able to reopen reported challenges in bringing employees back, including “workers’ health concerns, limited access to childcare, and generous unemployment insurance benefits,” the Fed reported, prompting some employers to increase wages to compensate.

The Fed also noted that the SBA’s Paycheck Protection Program emergency loans helped “many” businesses prevent layoffs, though it did little to stem the collapse in employment in the leisure, hospitality and retail sectors.

The May Beige Book comes as Republicans and Democrats struggle to find common ground on another round of stimulus spending after escalating warnings from economists and Fed Chairman Jerome Powell.

Senate Republicans have acknowledged that the steep economic toll of the pandemic will require further rescue spending to supplement the more than $3 trillion already approved by Congress. Even so, there are deep divisions within the GOP over what should be included in the next round of relief and how big it should be.

President Trump has also steadily increased pressure on states to lift business closures and other restrictions despite a nationwide rise in COVID-19 cases. Health experts stress that while the U.S. may experience a “slow burn” of novel coronavirus cases through the summer, the arrival of cooler fall weather and the beginning of school may cause a second spike.