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.