In a new report [1] to the Secretary of the Treasury, Beth Hammack, Chair, Treasury Borrowing Advisory Committee and Daniel Dufresne Vice Chair, Treasury Borrowing Advisory Committee outlined the current state of the economy and borrowing.
"Going forward, the coronavirus and weak global growth will be significant headwinds, while a large fiscal boost in response to the virus will provide some offset for the remainder of the year," the letter stated. "We applaud the efforts of Treasury, Congress and the Federal Reserve which were swift, deliberate and highly effective at reducing financial market volatility and will hopefully reduce the economic impact of the many shelter in place orders throughout the country."
As Hammack and Dufresne note, residential investment increased at a 21.1% annualized rate in the first quarter, its third consecutive quarterly increase and the largest increase since 2012. However, new home sales, housing starts, and permits all fell in March, and surveys of home builders have indicated a very low level of optimism. Mortgage rates declined significantly over the last year, which has provided a boost to housing activity.
Hammack and Dufresne's letter also covers the sharp rise in unemployment. The unemployment rate increased by 0.9 percentage points to 4.4% in March, while the broader underemployment rate increased by 1.7pp to 8.7%. The labor force participation rate declined by 0.7 percentage points to 62.7%, and the employment-to-population ratio declined by 1.1 percentage points to 60.0%. According to Hammack and Dufresne, the unemployment rate will rise sharply further, as jobless claims have spiked to record levels and have totaled 27.9 million over the last six weeks.
The Committee also recommended Treasury continue with its plan to begin monthly 20- year issuance this quarter, beginning with a $14 billion inaugural issue during the week of TIPS auctions, and $12 billion reopenings in the following two months. The Committee expected that auction sizes would gradually increase over coming quarters.
"Given the uncertainty inherent in fiscal projections and Fed balance sheet policy, Treasury will need to retain flexibility in its issuance path to respond to further changes in funding needs, market functioning and shifting demand preferences," the letter adds.