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Economic Indicators

April 28,29 ‘20 FOMC Meeting

In a Nutshell:  “The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Decision: Fed funds rate target range remains at 0% to 0.25%.

The Federal Reserve, as expected, kept interest rates at the lowest positive level possible.  But under the circumstances, the latest FOMC meeting was largely irrelevant.  What the Fed has done and will do on a daily basis is what we need to know about and we heard a lot about those actions during Chair Powell’s first ever remote press conference. 

The Fed Chair made one thing clear:  Within legal limits, the Fed will do whatever it can, for how long it needs to.  He reminded everyone that the Fed has essentially an unlimited amount of money to buy assets – and it intends to write that check.  He made it clear that more needs to be done and the Fed will do what it can.

But it is the lending to businesses issue that is raising the greatest concern.  This is an area the Fed hasn’t gotten into before.  The Fed has limitations on the risk it can take and it is expected to lend (indirectly) to those who can repay the loans.  That is somewhat like the old saying that banks lend to those who don’t need it while those who do cannot get loans.  Mr. Powell pushed the risk issue back to the Treasury Secretary, who has to make the determination how much the Fed can lose, which it will as it is backing loans.  But Mr. Powell seemed unconcerned about the fears that major firms (read Wall Street) will benefit while Main Street, which bears the name of the lending program, will not be helped – as usual.  His point was that he has to get funds out to companies that need it and the potential costs of being too careful far outweigh the gains from doing too much. 

Finally, the Fed Chair reminded everyone that the Fed can keep rates low and can lend money, but it cannot give households and businesses grants and it cannot make businesses and household spend.  He indicated that fiscal policy makers need to take the same view that budget deficits be damned, full spending speed ahead.  And this is correct.  The Fed can do only so much.  It needs Congress to keep going.  But Congress cannot just put together packages that sound good, but as we have seen already, don’t necessarily accomplish much. 

 (The next FOMC meeting is June 9,10 2020.) 

Economic Indicators

First Quarter GDP and March Pending Home Sales

KEY DATA:  GDP: -4.8%; Consumption: -7.6%; Durables: -16.1%; Imports: -15.3%; Equipment Spending: -15.2%/ Pending Home Sales: -20.8%

IN A NUTSHELL:  “Even though the business closings did not start in earnest until late in the quarter, the economy still contracted dramatically.”

WHAT IT MEANS:  The economy started shutting down in the middle of March, yet the decline in economic activity in the first quarter of 2020 was greatest since the collapse of the financial system at the end of 2008.  Even in the first quarter of 2009, when payrolls were being cut by 700,000 or more a month, the decline was not as steep.  That shows how massive the impact on the economy Covid-19 has had already, and the second quarter should be a lot worse. The report, to some extent, is indicative of what is going on.  Consumer spending tanked, led by a huge drop in durable goods demand.  Vehicle sales fell off the cliff in the latter part of March and while it may be slowly improving, the average for the second quarter should not be very good.  With the economy shut down, imports fell to their lowest level in three years.  Exports also declined, but at half the pace of imports.  That caused a significant narrowing of the trade deficit, which limited the drop in growth.  Business investment, led by a huge fall in equipment spending, was off sharply.  That was hardly a surprise since firms weren’t doing a lot of spending on capital goods for almost a year.  What did surprise was the modest rise in government spending, especially at the state and local level where all the action is occurring.  The federal government has been doing some buying, but is providing a lot less support than the state and local governments.  Also, residential activity posted a double-digit rise.  Given the sharp drop in the National Association of Realtors Pending Home Sale Index in March, that is likely to turn around sharply in the second quarter GDP report.  A note of warning: This is an advanced estimate and given the huge nature of the changes, don’t be surprised if the revised data look a lot different. 

MARKETS AND FED POLICY IMPLICATIONS:  The first quarter economic declinewasclose to consensus but greater than I expected.  I had assumed government spending, coupled with a major narrowing of the trade deficit would restrain the drop.  But a surprisingly large decline in business investment really did the economy in.  Regardless of what we saw in the first quarter, all eyes are on the second quarter, where we could see the largest drop since the Great Depression.  But forecasting that number with any accuracy is largely impossible.  We have no idea how fast the economy will start opening back up.  We don’t know how consumers will react to the opening, in terms of spending.  We don’t know the capacity of businesses to safely bring back workers and ramp up production.  We don’t know how much more money the federal government will pour into the economy, especially with an election coming up.  We don’t know how other countries will reopen and their appetite for our goods.  And we know very little about the course of the virus and how quickly drugs will become available on a widespread basis.  In other words, we know almost nothing.  That is why the estimates for the second quarter currently range from about -20% to -40%!It will be bad, but how bad we just don’t know.  But the real test will come not in the second or third quarter.  It is the fourth quarter and the first half of 2021 that will tell the tale.  That is when governments will have exhausted their funding and will be reducing support for the economy dramatically.  Businesses and households will have to be standing on their own or they will sink quickly.  It is important to recognize that even if we get just a 20% annualized decline in growth in the second quarter the level of economic activity will have fallen back to where we were in the first quarter of 2017.  In other words, we will have wiped out over three years of growth!  A 40% annualized decline would bring us back to the end of 2014.  Very simply, it is could easily take two years or more just to get back to the level of economic activity we had at the end of 2019.  And that does not factor in any lasting effects of the virus on consumer and business spending as well as the possibility of a resurgence of the virus in some form next winter.  Meanwhile, the equity markets keep rising as if nothing happened.  The S&P 500, as I write this piece, is back to where it traded on March 6th – of this year.Can we really say that the outlook for the economy over the next 12-18 months is the same as it was in early March, which is what the markets are implying?  That makes no sense to me, as an economist.  But then again, the markets had been soaring despite mediocre growth for over a year, so why should I believe that economic fundamentals would drive equity prices now?  Is it time to ask, once again, the question posed by former Fed Chair Alan Greenspan on December 5, 1996: “… how do we know when irrational exuberance has unduly escalated asset values…?”  Keep in mind, it took another 3½ years for the tech bubble to finally start to burst, so things could keep going for a while.

Economic Indicators

April Consumer Sentiment and March Durable Goods Orders

KEY DATA:  Sentiment: -17.3 points; Current Conditions: -29.4 points; Expectations: -9.6 points/ Orders: -14.4%; Ex-Transportation: -0.2%; Capital Spending: +0.1%

IN A NUTSHELL:  “Consumers are looking a little toward the future, but how long that will last depends upon the success or failure of the reopening process.”

WHAT IT MEANS:  The great unknown right now is what will consumers do as the economy starts reopening.  Clearly, as people get rehired and their incomes rise (if that is the case, which is not true for everyone), spending should improve.  But how much is the question.  That will depend upon consumer confidence.  The University of Michigan’s Consumer Sentiment Index tanked again in April, but the final reading was up a little from the mid-month reading.  That gain occurred when the first discussions about reopening the economy began.  As the month ended, though, it looks like the growing confidence faded.  Households are more hopeful about the future than they are about current conditions.  Whether that can be sustained will depend upon how well the openings go and whether there will be a resurgence of the virus.  As the report and many others, including myself, have pointed out many times, if we have to reinstitute stay at home requirements, the impacts could be devastating.   

Durable goods orders tanked in March, led by huge declines in aircraft and vehicle orders. But excluding transportation, demand held in reasonably well. Boeing had a large number of cancellations and orders fell nearly 300% over the month.  The sharp decline in vehicle sales caused a nearly 20% drop in orders in that sector.  Computer orders also fell sharply.  On the other hand, communications and electrical equipment demand rose.  There was a major surprise in the report: The measure of business investment spending, capital good excluding defense and aircraft, rose modestly.  Given all the shutdowns, that will likely be reversed when the April numbers are released.

MARKETS AND FED POLICY IMPLICATIONS:The high-stakes game of “open the economy” is starting.  It’s good to know that we can now go bowling, get our hair cut, work out and get all sweated up with our friends at a gym and then drop in to get a massage and a mani/pedi (whatever that is) in Georgia is heartening.  And, I really need a new tattoo soon, so that adds to my happiness. I am going to hop on a plane and get to Atlanta as soon as possible. I make no apologies for my view that opening too soon creates a massively greater risk than opening late.  The impact on consumer confidence and therefore spending of having to reinstituting restrictions could be devastating. It could wipe out much of the progress that could come from the consumer and business support programs passed by the government, as well as the credit and lending actions taken by the Fed.How we would get out of that hole is something I don’t even want to think about.  So all we can do is hope that the gamble works out.  How strongly demand rises, though, will depend upon how safe people feel.  There will likely be an initial jump in demand but it may not be nearly as great as many think.  As long as the virus is running wild, a significant segment of the population will either be unwilling to get back into the world or will do so in a limited way.  Since we are still well away from having a national testing system in place, don’t expect demand to surge and stay high.  Remember, the generation with the most disposable income is the baby-boomer generation and they are also in the high-risk category.  If they get back in the game cautiously, as I suspect will be the case, the V-shape recovery theory falls apart.  But even worse, a resurgence in the virus could send that group into hibernation and that would make a sustained recovery almost impossible.

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March Existing Home Sales and April Philadelphia Fed NonManufacturing Survey

KEY DATA:  Sales: -8.5%; Over-Year: +0.8%; Prices (Over-Year): +8%/ Phil. Fed (NonMan.): down 61.3 points; Firm Activity: down 69.7 points; Expectations: down 8.9 points

IN A NUTSHELL:  “The housing market is starting to get sick.”

WHAT IT MEANS:  Few sectors are immune from the virus ravaging the economy and it is not a surprise that housing is starting to show strains as well.  Going into March, this portion of the economy was in really good shape and was expected to lead the way.  Sales were strong and prices were starting to firm.  However, given the realities of social distancing, it is hard to convince people making their largest purchase that the house they are seeing on the Internet is the home for them.  True, everything you see on the Internet is true and accurate, but it you believe that, I’ve got a fixer-upper that is in pristine condition.  Make me an offer.  And that is the problem now, especially on the demand side.  The National Association of Realtors reported that sales fell sharply March and every region declined.  But to show how strong the market has been, the sales pace was still above the level posted in March 2019.  Though the inventory of homes for sale rose, it is still low. It will be interested to see if supply drops in the April report.  I have heard from realtors that they are pulling a lot of homes temporarily from the market.  Finally, prices soared.

The Philadelphia Fed’s index of nonmanufacturing firms crashed and burned in early April.  The index of economic activity dropped to -96.4.  The lowest possible is -100 and that was not reached because 1.8% of the respondents said regional business activity rose. The other 98.2% said it declined.  No one said it remained the same.  Amazing.  As for their own firm, 85.4% said activity fell while only 2.9% indicated it was up.  But those are hardly surprising results.  What was discouraging were the expectations data.  Confidence about regional and firm activity six months from now deteriorated.  Despite all the stories of reopening, business leaders seem to be less hopeful a return to good growth is in the cards. 

MARKETS AND FED POLICY IMPLICATIONS:The March data are trickling in and they are hard to get a good handle on the extent of the damage.  For some industries, the shutdowns didn’t occur until well into the month.  Thus, the readings represent a combination of pre and post-shut-down economies.  That is the case with the housing market.  We will not really know the extent of the harm until the April numbers are released.  It is hard, though hardly impossible, for closings to happen (for existing homes sales) or for contracts to be signed, which go into new home sales.  But virtual visits don’t replace in-person walk-throughs and as anyone who has bought a home knows, it is the feel that usually matters.  Pending home sales, which will be released on April 29th, should tell us a lot about the existing market. As for the economy, some states are trying to start things back up.The risk/reward of that is being hotly debated, but the downside seems to be a lot greater than the upside since there will be only modest initial increases in hiring and output.  A resurgence of the virus in those states could set back the process significantly.  But the governors in those states are willing to take that chance, so we are starting what is rare in social science: A real world mass experiment.  Meanwhile, the total and complete collapse of near-term oil prices shows the extent of devastation (and the impact of the Russia/Saudi price war).  It is unclear whether this will alter the thinking of most investors who apparent believe that the pathway back to normal is a V-shaped huge and rapid recovery.But it is a warning.When you start paying people to hold your product, you are in deep trouble.  That is what negative interest rates signal – massive economic weakness.  The Fed seems willing to shower the economy with all the liquidity it can handle and more, if necessary, so I don’t expect negative rates to become policy – thankfully.  But negative commodity prices are something we should not simply dismiss, even if they are only temporary.  The enormous problems we face in restarting an economy this big and this damaged have to be discussed first and then addressed.  Policymakers are treating the symptoms but have not even started the process of formulating a plan to reverse the damage. 

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Weekly Jobless Claims, March Housing Starts and April Philadelphia Fed Manufacturing Survey

KEY DATA:  Claims: 5.245 million; 4-Week Total: 22.03 million/ Starts: -22.3%; Over-Year: +1.4%; Permits: -6.8%; Over-Year: +5%/ Phila. Fed (Manufacturing): down 43.9 points; Orders: down 55.4 points; Future Activity: up 7.8 points

IN A NUTSHELL:  “Another week of massive unemployment claims and the end is not in sight.”

WHAT IT MEANS: When you shut down the economy, people become unemployed – duh – and the numbers we are seeing are unimaginable.  Over 5 million people filed for unemployment insurance last week, bringing the total to over 22 million in just the last four weeks alone.  Let me put this into perspective.  During the Great Recession’s peak filing period, which occurred in March 2009, “only” 2.64 million people filed during a four-week period.  That is, over eight times as many people filed for unemployment this year compared to eleven years ago.  While the claims numbers should decelerate, they could remain incredibly high for the next few weeks, as some states have just started to put in social distancing curbs.  It is likely the total will reach 30 million by mid-May.  It is hard to see the unemployment rate peaking below 20%.  That would be double the top reached during the Great Recession and it could probably even double the post-WWII 10.8% rate hit in November and December 1982.

Housing starts plummeted in March, but even that sharp decline may be misleading.  Construction had been on a roll for a year and it looked like this sector would lead the economy this year.  Thus, the large drop in construction may look bad, but starts were still higher than they were in March 2019.  I suspect that if we had the numbers for the last week of the month, they would show a much greater decline and that is the level we need to be factoring into the outlook for the economy.  It is unclear how far residential new construction activity will fall.  Only a few states are limiting activity and that is often just for spec construction.  The problem may be more in the multi-family area as social distancing requirements are harder to satisfy in large projects.

The Philadelphia Fed’s April index of manufacturing tanked, which was hardly a surprise.  There were some interesting numbers in the report.  Not one firm reported a rise in new orders while 71% said they declined.  But while order books thinned, the decline was not excessively large and over 16% saw their backlogs increase.  Despite the current carnage, respondents were more optimistic about the future.  The index of activity six months from now rose.  The easiest interpretation is that respondents believe we have hit rock bottom and there is no way to go but up.  Let’s hope they are right.    

IMPLICATIONS:  It seems investors think there is no amount of short-term damage to the economy that matters.  In the three weeks from March 21st, when the first massive job claims number was released and we saw that claims, not those unemployed, just those who could maneuver through the websites and file unemployment claims, reached a total of 22 million, the equity markets rose by double-digits and a record weekly gain were recorded.  Really, did anyone factor that many unemployed people into equity prices?  I doubt it.  And that total will only rise a lot more.  Previously, the largest number of people unemployed was 15.4 million in October 2009.  We are likely to see more than twice that number this time.  And even if the CARES Act artificially lowers the unemployment rate by shifting unemployment compensation payments from direct government checks to indirect government checks, the actual unemployment situation will not change.  Those private sector-government paid workers eventually have to actually work and businesses will have to make enough money to pay them. Over thirty million is a large number to find real work when the reopening is going to be phased in.  But hey, the relationship of Wall Street to Main has been tenuous for a long time so I guess we can chalk this up to … well I have no idea what.   

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March Retail Sales, Industrial Production, April Home Builders Index and Empire State Manufacturing Survey

KEY DATA:  Retail Sales: -8.7%; Ex-Vehicles: -4.5%/ IP: -5.4%; Manufacturing: -6.3%; Capacity Utilization (Man.): -4.7 points/NAHB: -42 points/Empire State: -56.7 points

IN A NUTSHELL:  “The decline in economic activity is breathtaking.”

WHAT IT MEANS:  The data are just starting to come for March and early April and they are even worse than expected.  Indeed, the declines were breathtaking.  Let’s start with March retail sales, which were down massively. Gasoline sales cratered, though some of that was due to the decline in prices.  But the rest of the categories show how demand has shifted.  The declining categories:  Vehicles (-25.6%), furniture (-26.8%), electronics (-15.1%), gasoline (-17.2%), Clothing (-50.5%), sporting goods (-23.3%), department stores (-19.7%) and restaurants (-26.5%).  Keep in mind, most of the closings were in the second half of the month.  Not surprisingly, supermarkets soared, posting a 26.9% rise.  Health care, building supply and online stores were up strongly, but those increases paled in comparison.  

A closed economy means reduced production and every single industry posted a decline in output.  This was the third greatest decline on record, with the other two occurring during the post-WWII demobilization period.  The largest drop was in vehicles, as the assembly rate declined by over one-third.  Eight of the nineteen manufacturing industry groups were off by double-digits.  Capacity utilization also fell off the cliff, dropping by the largest amount on record. 

Moving into early April, the National Association of Home Builders index was down an amazing 42 points.  It went from 72 to 30. Traffic largely disappeared.  So much for the housing market.  The New York Fed’s Empire State Manufacturing Index disappeared from sight.  That should not surprise anyone given that the New York metro area has been the epicenter of the pandemic. 

IMPLICATIONS:The economic numbers are coming in even worse than most economists expected.  We really cannot wrap our minds around these enormous levels of changes, so it is hard to forecast the total collapse that we are starting to see.  And the April numbers, which will reflect a whole month, are likely to be a lot worse.  Which brings us to the equity markets.  The spread of the virus may be easing, at least we hope.  New York looks like it is near or at the peak, but other areas are starting to heat up.  Every state is now involved.  Starting to open the economy in two weeks (May 1st) is hardly likely and when the economy does start to open, it is not going to happen quickly or easily.  Yet investors have been exuberant the last three weeks.  Is it rational or irrational?  Where is Alan Greenspan when we need him? First quarter earnings are just starting to come in and for most firms they are gruesome.  And that was with less than one month of a shutdown.  What happens when we have two or even three months of restricted activity in a quarter followed by a slow, rolling reopening?  It is hard to comprehend why businesses would invest in this type of economy.  Businesses may start opening, but which ones?  Without wide scale testing capacity, can we really open retail establishments that require social contact?  The rest of the world is also going to slowly reopen and who knows when that will happen.  And state and local governments are already starting to downsize as tax revenues are crashing.  It is one thing to say that the government and the Fed are pouring trillions into the economy, but it is another to say that demand will recover to anywhere close to what it had been in February.  And if it doesn’t, firms will not see demand raise enough to keep the government funded workers, so layoffs and business closings could resume.  Households will have used up some of the money they were given and if they don’t have jobs (the unemployment rate could still be double-digits in July), spending will fade.  And that could trigger a significant increase in loan losses and pressure on financial institutions.  That is the prospect for the summer/fall economy.  And what if the reopening has a set back due to a resurgence in parts of the country, even if those relapses are minor?  So, where are the profits going to come from?  I am just an economist, but I simply don’t see what investors are seeing and to be honest, what other economists are saying is going to happen.  I focus on the underlying factors that will drive future economic growth and earnings and while we will see an initial upturn once the economy reopens, the strength and length of that recovery is not clear at all.

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March Consumer Prices and Real Earnings

KEY DATA:  CPI: -0.4%; Over-Year: 1.5%; Ex-Energy: 0.0%; Over-Year: 2.1%/ Real Earnings: +0.8%; Over-Year: +1.6%

IN A NUTSHELL:  “Inflation is really not doing much, which is a surprise given the craziness in the economy.”

WHAT IT MEANS:  Consumer prices fell in March, which surprised no one.  Given the collapse in the economy, that was expected.  But much of that decline was due to a double digit declines in gasoline and fuel oil.  The price war between Russia and Saudi Arabia made that happen and was expected.  Excluding energy, costs were flat, which was a surprise.  Food prices, both at home and away, were up solidly, while services prices were flat.  In the services component, shelter expenses, which had been surging, flattened out.  But medical costs, which also had been rising sharply, increased even more.  Transportation was down sharply. 

The earnings numbers in March implied that workers did really well, as wages rose sharply.  Adjusted for the decline in prices, that meant real earnings soared.  But these data are misleading.  The large rise in average hourly wages was due to the way the number is calculated.  It is a weighted average.  In March, the huge drop in employment came from major layoffs in lower paying industries.  Higher paying sectors lost relatively less.  So, when you do a weighted average and you take out more from the bottom than the top, the average rises.  I don’t think workers did particularly well in March.    

MARKETS AND FED POLICY IMPLICATIONS:  In some respects the relatively mild decline in consumer prices and the flat change excluding energy is good news.  Core inflation, which excludes volatile food and energy, had been slowly climbing back to target levels.  A massive collapse in the economy was expected to lead to a major deceleration in inflation, which could be worrisome.  That did not happen.  With energy prices bouncing off the bottom, we could see the headline number up in April.  Thus, the shut down of the economy has not yet lead to a deflationary environment. It is hard enough to fight a virus-induced decline in economic activity, having to deal with falling prices as well is not something the Fed wants to face.  Of course, getting the economy going again will be the best way to fight any decline in inflation.  I think the economy will have a ‘Vu’ recovery.  We may get a major rebound, if only because opening closed sectors means that activity will surge.  But it is the following few quarters that really matter and it will be hard to sustain demand when we start with and unemployment rate that could hit 20%.  The unemployment rate in February was 3.5%.  Getting back to an unemployment rate close to that level, and I define close as one percentage point above the bottom, could take five years.  That was the pattern in the past and it could easily take that long after this crisis.  That means after the rebound, there could be a slowdown as the government’s welfare program fades and businesses have to actually earn money to pay for their workers.  That would then lead to a slow recovery, similar to what we saw after the Great Recession.  Investors may think that the problems are behind us, but reopening and repairing the economy is not going to be easy and it will take a long time.       

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Weekly Jobless Claims and Early April Consumer Sentiment

KEY DATA:  Claims: 6.6 million; Insured (Level): 7.46 million/ Sentiment: -18.1 points; Current Conditions:  -31.3 points

IN A NUTSHELL:  “With 16.8 million new unemployment claims in just the past three weeks, the unemployment rate could easily reach 20%.”

WHAT IT MEANS:  The drumbeat of shockingly bad labor market numbers continues.  Another 6.6 million people filed for unemployment insurance last week, bringing the total for just the past three weeks to 16.8 million workers.  Keep in mind, not everyone is eligible for unemployment insurance.  However, with CARES Act allowing small business owners to file (they made unemployment insurance payments but weren’t eligible themselves), the number is a better measure of the loss of jobs than previous numbers.  Regardless, what we are seeing is an emptying out of the employment rolls that represents the impacts of the shut downs.  And with some states just starting to close business, these numbers should remain high for a few more weeks.  However, I do expect them to start trending downward.  The number of insured is lagging the claims numbers and that is already at a record high.  So, expect us to take out the Great Recession unemployment high of 10% and even the post-WWII high of 10.8% posted in December 1982, possibly as soon as the April report.

The consumer confidence numbers are starting to catch up with reality.  The University of Michigan’s early reading of April Consumer Sentiment fell sharply.  But it was the Current Conditions Index that crashed and burned.  I had noted in the last commentary about this indicator that households seemed to be delusional.  No longer.  And there was a clear warning in this report: “Consumers need to be prepared for a longer and deeper recession rather than the now discredited message that pent-up demand will spark a quick, robust, and sustained economic recovery.”  

Labor and Equity Market Implications:  When all is said and done, the unemployment rate could exceed 20%.  That depends upon how many workers are transferred from the unemployment insurance rolls to the CARES Act, government paid, private sector payrolls.  Those being paid by the government but carried by private firms are technically not unemployed, so as I have noted before, the unemployment rate will be an artificial measure.  Nice trick.  But the CARES Act also creates a conundrum for low to moderate-income workers.  For as long as the extra $600 per week addition to unemployment compensation persists, total payments to lower paid workers will likely replace all of what they lost (and maybe even more).  Thus, the incentive for many unemployed is to not accept a job offer to return to work.  That sets up a potential battle between employers and former employees.  For the CARES Act loans to become grants, firms need to rehire/replace a significant proportion of their former payrolls.   This will incent firms to pressure workers to take job offers, even if those jobs are not in the best interest of the workers.  Welcome to the world of unintended consequences.  And even if the unemployment rate winds up maxing out “only” in the low to mid-teens, it would still be well above the Great Recession high of 10%. 

After the back-to-back recessions in the early 1980s, it took over four years to get within one percentage point of the previous expansion’s low unemployment rate.  It took five and a half years after the peak in the unemployment rate was reached during the Great Recession to get back to within a one percentage point of the previous low.  Since the CARES Act unemployment rate will already include a large number of rehired workers, we might not see a surge in hirings once the economy is reopened.  Thus, it could take five years to get within one percentage point of the February 2020 rate.  That has some significant implications for the equity markets.  Currently, investors seem to think that the massive government and Federal Reserve loan and grant programs will get the economy bouncing back quickly.  It seems like a V-shaped recovery is getting baked into the cake.  But those programs will start to wear off.  The government doesn’t have an infinite amount of money to keep paying workers that are on private payrolls.  Those firms will eventually have to become profitable enough to pay their workers by themselves.  Yes, public welfare is great when you are receiving the funds for free and business owners are gratified for the largesse.  But that approach is only a crisis-created way of life.  Eventually, capitalism must be reign and with the unemployment rate so high, spending power will be limited.  Eventually, earnings growth for the second half of this year and for 2021 has to be factored into equity prices. The claims data point to double-digit unemployment rates and if we do hit 20%, don’t expect earnings to be great for many companies for quite some time.  Worse, if the rate remains near 10% for an extended period, the level of demand will not be enough to support many of the smaller businesses that were already living hand to mouth before the pandemic.  So expect layoffs to resume during the second half of the year as the government funds get withdrawn.  The alternative is longer and more expensive government subsidies and a massive budget deficit that will lead, ultimately, to crushing spending and tax changes.  If anyone thinks that we can spend our way out of this at the level we are spending, without longer-term consequences, they are deluding themselves.

Economic Indicators

Weekly Jobless Claims and February Trade Deficit

KEY DATA:  Claims: 6.65 million/ Deficit: $39.5 Billion (down $5 bil.); Imports: -2.5%; Exports: -0.4%

IN A NUTSHELL:  “With some states, such as Florida, just discovering there is a pandemic, look for the unemployment claims to remain in the millions for a few more weeks.”

WHAT IT MEANS:  Last week, it was reported that new claims for unemployment insurance hit a record level that was five times the previous high.  We doubled that number in today’s report.  In just two weeks, ten million people have applied for unemployment insurance.  Have we topped out?  That is not clear, as it appears there are still a lot of new claims that could come in from the epicenter, New York, as well as other areas that are starting to see more and more shutdowns.  And, of course, those states that were living in denial are starting to wake up and face reality, so claims in those states should begin to skyrocket.  It is not unlikely that upwards of twenty million people will wind up applying for unemployment compensation and that total will not include those ineligible, for whatever reason, for the program. There is one really big and important difference this time: Under the CARES Act, some business owners who would not have been eligible under the old laws can now collect unemployment insurance. 

The trade deficit narrowed sharply in February.  The sharp decline in imports point to what is likely to be continued significant cutbacks in U.S. purchases of foreign products.  As much of the February trade numbers reflect decisions made months before, the details really are not very relevant to the current or future economy.  But there was distressing news for farmers.  Sales of soybeans, which were expected to jump after the phase-1 China trade agreement, collapsed.  The idea that China will ramp up its purchases of U.S. goods this year is gone. Maybe next year.  We also sold a lot of energy products, but given the collapse in demand and price, that will not likely be repeated when the March data are repeated.  And vehicle sales, which also rose solidly, you can forget that for a while.  As for imports, fuel and computers were the chief products that saw less U.S. demand.   But to the extent that more computers are needed to support the remote economy, that could turnaround.

LABOR MARKET IMPLICATIONS:  We are headed toward double-digit unemployment rates that could breach 20%.  The CARES Act will soften that rise as it moves workers from the unemployment rolls to private sector payrolls.  One thing it does not do is necessarily create more output.  Businesses don’t have to have the workers do anything to get the money.  The intention is to create what I would call a “reserve army of the employed”.  These are people who are getting paid by the government but technically “employed” by businesses, no matter what they do or not do.  (Remind you of any other economic system?) 

For some firms, such as family run businesses, this is the greatest thing ever created.  They can hire their family members, to the extent that is legal (and according to some accountants I talked with, to some extent that is the case), and keep the income within the family.  That will allow them to subsidize the business and likely keep them from failing.  That may also be a rational strategy that firms that didn’t employfamily members might employ.  What that means for the unemployment rate is unclear.  If some of the family members hired were not part of the labor force previously, their hiring will not reduce the unemployment rolls.

Ultimately, the government payroll payments will have to end and private sector companies will have to start earning the money to pay those workers.  That is when demand will become key and for any economic recovery that results, the rubber will meet the road. When the upturn in the economy does appear, we could get a quarter or two of very strong growth, but only because we fell so far so fast.  It is the second and third and fourth quarters after the bottom is hit that matter.  Given that as well intentioned as the CARES Act is, and it is targeted more toward workers and small to mid-sized business than most previous so-called stimulus packages, it can only do so much.  

Thus, what we should really be calling the CARES Act is a stabilization plan, not a stimulus plan.  We need that desperately right now.  But it is just a start.  The lasting strength of the recovery will be determined by how well we wean businesses and households off the welfare state and return them to an economy based on capitalism. 

Economic Indicators, Uncategorized

Weekly Jobless Claims, 4th Quarter GDP 2nd Revision and a Commentary on Planning

KEY DATA:  Claims: 3.28 million/ GDP 2.1% (Unchanged)

IN A NUTSHELL:  “The unemployment rate is like to go into the double-digits.”

WHAT IT MEANS: In large parts of this country the economy has essentially shut down and now we are starting to see the data that indicate the extent of that closing.  New claims for unemployment insurance, not surprisingly, skyrocketing to 3.28 million, the highest level on record.  The previous record was 695,000 in October 1982.  This is the not the only week we will see extraordinarily high claims numbers as not all shutdowns occurred at the same time.  So expect the unemployment numbers to rise by millions more.  It should also be remembered that many small businesspeople are not eligible for unemployment compensation if they are owners.  Thus, we are likely to be underestimating the true state of unemployment.  Regardless, we are likely to get to double-digits and how high that goes depends upon when the economy starts to reopen.

The final reading of fourth quarter 2019 GDP came in at 2.1%, which is unchanged from the previous estimates.  The economy ended last year growing at trend growth, which is what was expected, and started off this year on a fairly high note.  Part of that was weather driven, but at least economic conditions were not faltering going into the shutdown.       

Commentary: The Fed vs. the Government: Planning actually works!

The starkest difference in the reaction to the pandemic was between the Federal Reserve and the federal government.  The Fed has moved rapidly and strongly and there is a very simple reason: It learned the lessons of the financial market meltdown.  In 2008 – 2009, the Fed had no strategy to deal with what was happening.  The near-worldwide financial meltdown was not something that had been game planned.

But to its credit, the Fed has spent the last decade researching what worked, what didn’t and what needed to be done if there was another massive economic and/or financial crisis. It didn’t need anyone to tell it that a crisis was coming and it moved quickly and effectively to put in place the policies it had already identified as necessary.  The Fed had a game plan, it was not caught flatfooted and it moved to make sure the financial markets got the liquidity they needed.  There is still more to be done, but research and planning worked.  Kudos to past Fed Chairs Bernanke and Yellen, as well as current Chair Powell for getting the Fed as ready as possible for the current crisis.

And then there is the federal government.  It started first with denial that there was an issue, moved to disbelief that the problem could be large and finally to ragged, uncertain and uncoordinated reactions.  There doesn’t seem to have been a plan in place, despite warnings as recently as 2017 that a pandemic was possible and strategies had to be developed.

The implications of the failure of the federal government to have a plan to deal with a crisis similar to the current one are enormous.  Without a plan, policies to address the problems have lagged.  While other countries ramped up their testing, we are still well behind the curve.  Two nights ago, I was on a Zoom meeting and a senior manager at a major local hospital said that it was still taking four to six days to get test results back and that was for patients admitted because their symptoms mirrored those of Covid-19.  That required the hospital to treat the patients as if they had the virus and therefore critical, limited resources were wasted on patients that ultimately tested negative.  

In addition, the failure to ramp up testing and increase availability of critical medical supplies, as we saw in other countries, have created significant issues going forward.  Knowing who has the virus, who had the virus and who hasn’t had the virus is key if we are going to reopen the economy.  Otherwise, we don’t know the risk of potentially reopening early.  There is a debate going on that asks the question “when should we start reopening businesses?”  We all want the economy to reopen as soon as possible, but we also don’t want a relapse. 

If we are forced to shut down a second time, the attempts to stabilize the economy that have passed Congress will largely be wasted.  If we have to shut down again, it will come when the economy was greatly weakened and therefore less capable of handling the shutdown.  And if we have to shut down again, federal, state and local budgets will largely be busted.  And those are just the economic implications.  Clearly, the death toll will rise sharply if there is a relapse as it is not clear if the health care system could handle a second surge. 

My view is that it is better to err on the side of safety than on the side of speed.  We need to be as reasonably certain as possible that a relapse has a relatively low chance of occurring.  We will not be able to know with certainty, but that means this decision has to be made by experts.  The short-term economic costs of opening later may be greater but the longer-term economic and social costs are likely to be less.  That is my view.  Everyone needs to determine for themselves the risks of opening too soon and express those views, as this debate is raging right now.       And going forward, the federal government cannot be caught flat-footed again.