In a Nutshell: “The path of the economy will depend significantly on the course of the virus.”

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

The Federal Reserve made it clear today that there is no time limit on its intervention in the markets nor is there a limit on the amount of funds it can or will spend to keep the economy from faltering. That was expected and the Fed delivered.  But Fed Chair Powell also noted that the Fed can supply funds but cannot spend those funds.  Actually, the comment he uses is that the Fed “has lending not spending powers”.  Thus, its loan programs may not be right for all businesses.  Instead, Mr. Powell noted that additional direct funding on the part of the federal government might be needed.  In other words, he was hinting, quite strongly and clearly without saying so, that further fiscal stimulus is required.  As is usually the case with Fed Chairs, he declined to advise Congress and the president on what policies to continue funding or at what level.  He ain’t no fool!

What the Fed also tried to make clear is that the best economic policy is one that addresses controlling the virus.  He noted that the economy would not get back to previous levels until people feel comfortable being involved in all normal economic activities.  He commented that measures of consumer spending have softened since late June. The resurgence of the virus in June is having a real effect on household behavior and that is worrisome.  

So, what should we take away from the Fed’s actions?  First, the Fed is operating on the basis that this could be a long-term problem and is making it clear the monetary authorities are prepared to stay the course. That means interest rates will likely remain near record lows for an extended period.  The best way to look at this is in six-month increments, since we know little about the timing of vaccines or treatments.  So, rates will likely not be going anywhere for at least the next six months.  

But the reality is that the economy will not be getting back to where it was at the end of 2019 for eighteen to twenty four months, a point the Fed Chair made.  That implies the Fed is on likely on hold through next year and probably well into 2022.  The Fed will also continue its lending policies and much of its market intervention (bond and equity purchases) through next year as well.  When the Fed starts lowering its purchases, that will be a signal it is starting to see the light at the end of the tunnel.  

Ultimately, it is all about the virus and if we keep making mistakes that cause resurgences to occur, the economy will remain weak and support from both the Fed and Congress, will be needed.   

 (The next FOMC meeting is September 15,16 2020.) 

KEY DATA:  Sales: +13.8%; Northeast: +89.7%; Prices (Over-Year): +5.6%

IN A NUTSHELL:  “The highest new home sales pace in thirteen years shows that at least one segment of the economy is back up and running.”

WHAT IT MEANS:  Housing has been leading the recovery and it continues to do so.  New home sales soared again in June.  The pace was the strongest since July 2007.  It didn’t matter if a house was completed, under construction or not even started, buyers bought.  The gains, though, were somewhat unevenly distributed across the nation.  There was a near doubling in contract signings in the Northeast, a region that was crushed by the virus and has just really started opening up.  Clearly, there is a lot of pent up demand in the states in that region and it is being met.  But when a section that usually comprises maybe five percent of total sales accounts for about twenty eight percent of the new demand, you know there was a special situation.  Still, sales were up strongly in the other three regions, so this is a real recovery.  On the prices side, the cost of a new home continues to rebound back toward where it was before the recovery.  With demand rising and inventories falling, builders have every reason to be happy and keep pumping out new homes.          

IMPLICATIONS:   Next week we get the first reading on spring GDP and it should show the largest quarterly decline on record.  With the economy starting to, the June data, which are the starting points for third quarter growth, were well above April’s horrendous shutdown numbers.  So we should expect the summer quarter to post possibly the largest rise on record.  But the virus resurgence has raised questions about the extent of that increase.  The V-shape recovery true believers were looking for a percentage gain equal to about two-thirds to three-quarters the size of the decline.  But that is looking like an overly optimistic outlook.  Yesterday’s rise in new claims for unemployment insurance is likely to be the first of many increases if the virus remains at its current level, let alone increases in those states that have managed to keep it somewhat in check.  The PPP is starting to run out and firms that will now have to make money the old fashioned way (by earning it), will likely start cutting their workforces in order to survive.  And it is likely that the next business and household payments plan coming out of Congress will be significantly lower than the last one.  That can only mean many people will see their disposable income decline – and their consumption follow suit.  Where we go from here is anyone’s guess, but I think the third quarter is setting up to show disappointingly strong growth.  Yes, that sounds ridiculous, but if you were expecting growth to be in the twenty-five percent range and it turns out to be closer to ten percent, then it is really not great.      

All that said, the Phillies open up tonight.  Yes, I know, they are a long-shot, but baseball is back and I am a huge baseball fan, so until they are eliminated, all I have to say is:

LET’S GO PHILLIES!

KEY DATA:  ADP: +2.37 million/ ISM (Manufacturing): +9.5 points; Orders: +24.6 points/ Layoffs: 170,219/ Construction: -2.1%; Private: -3.3%

IN A NUTSHELL:  “Tomorrow’s employment report should be good, though there are some real questions about the May one that creates confusion about how strong it will be.”

WHAT IT MEANS:  Our first reading of the pace that the reopenings are bringing back jobs comes tomorrow when BLS releases the June employment report.  Today, the employment services firm ADP released its estimate of June private sector payroll changes and it was pretty much as expected.  Large gains were recorded across all sizes of firms, while most industries added to their workforces.  The only weak areas were information services, mining and management companies.  But the confusion about tomorrow comes from ADP’s May numbers, which showed that the job losses, not gains, were even greater than expected.  In essence, they doubled-down on their estimate that the economy did not add jobs, as BLS reported, but actually lost over three million workers.  As I noted last month, the ADP and BLS numbers sometimes vary greatly, but it is not normal that they have a different sign.  Thus, it is unclear if the government’s May numbers will be revised significantly and if that is the case, what that means for the June data.  So, stay tuned.

In line with so many other reports, the Institute for Supply Management’s Manufacturing activity index popped in June.  Orders and production surged, which hardly was a surprise.  But also consistent with previous reports, employment and backlogs continued to decline, though at a slower pace.  That does not bode well for employment or production. 

Disappointingly, construction spending continued to decline in May.  The government did its part in trying to get the economy going, but private sector housing and most components of nonresidential construction were off. 

Layoffs continue at a huge pace, but at least the number of announced cutbacks slowed in June.  Challenger, Gray and Christmas reported that June’s number was down 57% from the May total.  Still, the second quarter total was twice as large as the previous record that occurred during the dot.com crash in 2001. 

IMPLICATIONS: Tomorrow is a big day as we get both the employment report and the unemployment claims data.  It looks like we could have another multi-million job gain, though who knows what the revisions to May will look like.  Regardless of what comes out, the claims numbers cannot be an afterthought.  They indicate the extent to which companies and governments continue to shed workers.  We need to get those number down dramatically as it is clear the reopening is not going as planned – or at least as planned by the early-openers.  That has forced the more cautious governors and mayors to slow the process down.  By the way, how come no one is talking about how the hot weather will slow the spread of the virus?  The sharpest increases in cases have largely been in the hot weather states of Florida, Texas, Arizona, and California.  But with investors, bad news on the virus front is viewed as good news and anything that points to some progress on the vaccine front is considered to be fantastic news.  As one investment advisor mentioned to me, the strategy is simple: Invest.  With the Fed backstopping the markets, that worked quite well in the second quarter. 

KEY DATA:  Consumption: +8.2%; Disposable Income: -4.9%; Prices: +0.1%; Over-Year: +0.5%; Ex-Food and Energy: +0.1%; Over-Year: +1%/ Sentiment: +5.8 points

IN A NUTSHELL:  “Households are spending again, but there is still a long way to go to get back to where we were.”

WHAT IT MEANS:  We are starting to see the impact of the economy reopening and the early signs are positive.  Consumption soared in May, led by a huge rise in durable goods i.e., vehicle sales.  Still, spending was up sharply in every category, a clear indication that people are ready and willing to keep spending more.  They have a long way to get back to where they were.  The number to compare is February spending and the May level is still off by over eleven percent.  In addition, the prospects for spending are somewhat cloudy.  It is all up to the federal government.  Disposable personal income fell sharply, but that was expected and that highlights the issue facing the economy.  Income gains and losses are being driven by massive changes in government social benefit payments.  They skyrocketed in April as the unemployment rolls soared.  As people are rehired, those income transfers will decline.  To put this in perspective, in April, government payments rose by $3 trillion, offsetting the $700 billion decline in wages and salaries.  In May, government benefits dropped by $1.1 trillion, but wages and salaries increased only $233 billion.  It is the government that is keeping spending going, not the private sector and that exposes the economy to the whims of Congress and the administration.  With incomes falling, the savings rate declined, but the 23.2% rate is still enormous.  As for inflation, prices stopped falling, but they are hardly rising. 

With the economy reopening, you would expect confidence to surge.  It is rising, but not once again, at a somewhat disappointing pace.  The University of Michigan’s Consumer Sentiment index was up solidly in June, but the level is still up only about ten percent from its April low, while it remains nearly twenty-three percent below the February high.  We are looking at 2014 numbers.  Both current conditions and expectations increased a similar amount.  One troubling element in the report was the final index being lower than the mid-month level.  The virus looks like it was the reason for that downturn.  The gains in the South and West, where the virus is surging, were significantly lower than in those areas where progress against the virus continues to be made. 

IMPLICATIONS:  The economy faces a dual threat: The resurgence of the virus and the vagaries of politics.  While the states suffering major jumps in new cases have not pulled back, some have slowed the reopening process.  That could be enough to cause people to become less willing to go out and spend at stores and restaurants or return to high-density work locations.  It is clear that large-group gatherings are not going to happen for quite some time.  That raises questions about the ability to repopulate office building and as a consequence, the ability of those firms that depend upon those workers to survive.  The summer should have been a time of reviving hope, but the virus operates on its own timetable.  And then there is Congress and the administration.  From the income numbers, it is clear that the major force in keeping things from falling apart is the enhanced unemployment compensation and to a lesser extent, the PPP.  Like it or not, the extra $600 per week is pumping massive amounts of money into the economy.  It is currently slated to end July 31^st.   The PPP is not going to grow.  Put that together and the prospects are that without action, income could crater in August and spending will follow.  Consequently, something will have to get done, but the more the government is the income provider of last resort, the higher the budget deficit and the greater the issues will be on the other side.  The Committee for a Responsible Federal Budget forecasts this year’s deficit at $3.7 trillion using just current law, not any expected additional assistance.  Don’t be surprised if the deficit is well north of $4 trillion.  That is incomprehensible, but no one is giving it even a first thought. It is nice to look at the monthly data and think everything is beautiful and happy days are here again.  While the focus of attention must be on keeping the economy going, we also have to start thinking about what the economy may look like when we get through this.  That is what will ultimately determine the direction of the markets in the medium term.  Right now, few seem to be doing that.  

KEY DATA:  Claims: 1.48 million (-60,000); Continuing Claims: 19.52 million (-767,000)/ Orders: +15.8%; Ex-Transportation: +4.0%; Capital Spending: +2.3%/ GDP: 5% (Unchanged)

IN A NUTSHELL:  “The labor market is getting better at a disappointingly slow pace.”

WHAT IT MEANS:  The economy is reopening and people are being called back to work, but the improvement in the labor market remains a lot slower than expected.  Yes, new claims for unemployment insurance fell again, but the level remains near 1.5 million.  That is simply way too high.  The rate of decline largely flattened out in June, which is not a good sign given the acceleration in the reopenings.  The number of people receiving checks slipped below twenty million, but barely.  The decline over the week was reasonably high, but given the huge number of people receiving assistance, it was not as large as we should be seeing. 

Durable goods orders surged in May, but that came after two months of massive declines.  The number to compare is February’s and orders are still off 21% from that month’s level.  The biggest increase came in transportation.  The vehicle industry reopened and aircraft orders actually rose rather than declined due to cancellations.  Every major sector posted a gain, but given the previous declines, the increases were nothing to write home about.   Nondefense, nonaircraft orders, a proxy for capital spending, did improve solidly, but again, compared to February’s level, they are still off 5.6%.  In addition, order books were largely flat, not a good sign for future production.

First quarter GDP growth was unrevised from the previous estimate.  There were some changes in inventories, government spending and fixed investment, but the differences were nothing special.

IMPLICATIONS:I guess the best way to describe the unemployment numbers is disappointing.  The economy is reopening across the country yet layoffs remain at an unimaginably high pace.  If BLS finally figures out how to correctly categorize the unemployment data, it is possible that the unemployment rate will rise in June from the underestimated May level.  The number to compare is about 16.3%, though we cannot be sure since the misclassification adjustment was only estimated.  My rough estimate for the June unemployment rate is 15%.  That would be down from the number to compare but up from the 13.3% which was published.   The problem is that cut backs in companies and governments are offsetting some of the rehirings.  It looks like we will have about six million layoffs in June.  That means the reopening/expanding firms will have to hire back more than six million just to get back to even.  That is a tall order and it means June job gains will likely disappoint.  With the virus starting to run rampant in some early-opening states, it is becoming clear that the recovery will take longer than those who have the V-shaped economic growth pattern expect.  And many of those who believe in the exuberant growth theory are investors. 

KEY DATA:  Claims: 1.51 million (down 58,000); Continuing Claims: 20.54 million (down 62,000)/ Phila. Fed: +70.6 points; Orders: +42.4 points; Employment: +11 points/ LEI: +2.8%

IN A NUTSHELL:  “Progress is being made on the unemployment front, but it is disappointingly slow.”

WHAT IT MEANS:  Even though the economy continues to reopen, the focus of attention remains on the labor market and right now, the improvement is less than hoped for.  New claims for unemployment insurance fell only modestly.  Yes, a 58,000-drop is a lot of people on an absolute basis, but given the huge number of people continuing to file – over 1.5 million – it is not that great.  With the entire country loosening restrictions, it was expected that the pace of workers being let go would decline and that would lead to a sharp drop in the number of people receiving unemployment checks.  While the continuing claims number did fall, the pace of decline was also disappointing.

The Philadelphia Fed’s manufacturing index skyrocketed in early June.  It was expected to improve, but not nearly as massively as we saw.  However, this is a dispersion index and as I have mentioned before, you have to read these results carefully.  There are three categories in the survey, increase, no change and decrease.  When you go from decrease to either no change or increase, the index rises.  When you go from no change to increase, the index rises.  Thus, firms that had largely shut down in April, started to reopen in May and the process accelerated in early June.  So they tended to move “up” from decrease or no change.  Most firms are now either no longer cutting production or have stabilized (no change) or started back up.  But the report says nothing about the pace of activity.  So, you can have a huge change in the index without a similar huge change in production.  A sign that is the case is the employment index.  It was still negative, but layoffs are occurring at a slower pace.  Thus, don’t look at this report as saying manufacturing in the Mid-Atlantic region is surging.

The Conference Board reported that its Leading Economic Index jumped in May.  Again, this is a measure that has to be analyzed in detail and the details don’t say the economy is going to soar.  As the report noted, “The relative improvement in unemployment insurance claims is responsible for about two-thirds of the gain in the index”.  But we know, the level of claims remains at incomprehensibly high levels, so I am not impressed with the increase.  Indeed, I agree with the conclusion of the report: “The breadth and depth of the decline in the LEI between February and April suggest the economy at large will remain in recession territory in the near term.” 

IMPLICATIONS:  Unfortunately, the best way to describe the today’s labor market numbers is disappointing.  It is clear that a large number of firms and governments are continuing to cut their workforces.  Over the past four weeks, roughly seven million workers filed for unemployment compensation.  That is huge and it is important because as firms reopen, they are hiring back workers, which should lower the unemployment rate.  But before that can happen, hiring companies first have to overcome the loss of jobs from businesses cutting back and that level is extraordinarily high.  We can see that problem in the continuing claims data.  The number of people receiving unemployment checks hardly declined, indicating that at least so far, hiring firms are barely overcoming the firing firms.  Thus, the may not see a major decline in the June unemployment rate. Indeed, if BLS finally corrects its misclassification problem, we could actually see the rate rise from the May published rate.  That is because the “real” or “comparison” rate is not 13.3% but something around 16.3%.  Conditions are improving, but we need to stop looking at the percentage changes and start focusing on levels.  When you start at a very low level, the percentage change is going to be large.  That is just simple math.  But if the level remains low compared to pre-virus levels, that indicates the size of the hole that we still have to climb out of.  Right now, with 20.5 million people still receiving unemployment checks and undoubtedly many millions more unemployed, the hole remains extremely deep.  Almost certainly, fiscal policy will have to step up once again when the current unemployment subsidies disappear as scheduled to happen at the end of July.  Otherwise household incomes will fall sharply and much of the current rebound will fade.      

KEY DATA:  Sales: 17.7%; Ex-Vehicles: +12.4%/ IP: +1.4%; Manufacturing: +3.8%/ NAHB: +21 points

IN A NUTSHELL:  “The reopening is creating massive increases in activity and that should continue in June and maybe even in July.”

WHAT IT MEANS:  The economy shut down in March and April, so when it started to reopen, it was expected that all the indicators would rebound sharply.  Well, just as we had historic declines in the previous month, we now have historic increases.  Retail sales soared in May, led by a rebound in vehicle purchases and demand for clothing.  The clothing number is a clear example of the volatility of the data.  In April, clothing purchases largely disappeared.  The level was less than one-third the lowest on record, which dates back to 1992.  May was up 188% from April’s historic low.  That looks amazing, but it is still down 63% from the February 2020 number.  So be cautious in thinking that happy days are here again.  We still have a long way to go before we start seeing numbers anywhere near what we had been recording.  Still, this was very good report.  Every component of sales rose and it was good to see restaurant demand pick up.  Of course, the food services component was still off nearly 40% over the year.

Industrial production was up solidly in May as well, mirroring the reopening of the economy.  Manufacturing activity jumped, though much of that came from the reopening of vehicle assembly plants that had been idled.  In April, almost no vehicles were built.  In May, they were at a 2.7 million annualized pace.  To put that in perspective, nearly eleven million vehicles were assembled in 2019.  Still, the sector is ramping up and that is key.  The paper products industry actually cut production for the fourth consecutive month.  If you were wondering why the stores remain empty, that tells you everything.  Why the sector hasn’t recovered is anyone’s guess.

Housing is coming back as well.  The National Association of Home Builders’ index surged in early June, with all components up massively.  The index is actually back to where it was in 2016 and is not that much below where it was a year ago.  That is the comparison we have to look for: How far have we come back to more normal levels.  The housing industry is not there yet, but certain components are getting there.  The housing starts and sales numbers for May and June will be telling.   

IMPLICATIONS: The economy is recovering, but when you start at historic lows and you reopen, that should not surprise anyone.  The issue over the next two or three months will not be how big a gain we get, but how close we get to the end of 2019 levels.  The strong retail and production numbers should lead to some improvement in second quarter forecasts.  I don’t expect to see too many forty percent declines and estimates in the thirties may start to disappear.  The latest Blue Chip consensus for the second quarter was -35.7%.  I started at -22% two months ago and reduced that decline to -18% last week.  I am sticking with it, though it is pretty close to the lowest decline in the forecast panels.  Keep in mind, if we get something in the 20% to 25% range and the reopenings continue to accelerate, then the third quarter growth rate would be a lot lower than people currently think. The Blue Chip estimate is +17.2%.  I am at +6%, so I am a true outlier.  Still, the real issue is how long it takes to get back to where we were when the virus shut things down.  Even the optimistic Blue Chip numbers, GDP doesn’t recover until near the end of 2021.  I don’t have it fully recovering until spring 2022.  What I am saying is that we knew the second quarter would be horrible and the third quarter would be great.  But it is the fourth quarter and 2021 that really matter and it is hard to forecast those growth rates because we will not know the extent of the damage until the end of this year.  So, enjoy the great data that we will be getting for the next two to three months, but also wait to see what things look like at the end of the year before getting too bulled up about 2021.    

In a Nutshell:  “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

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

The Fed kept rates close to zero today.  But that was not a surprise.  What observers were looking for was the tone of the message and the hints the members were sending as to how aggressive they will be going forward.  Put simply, it’s pedal to the metal for quite a long time.

During his press conference, Fed Chair Powell made it clear that there is no timeframe for when the central bank will move off of its aggressive, low rate policy.  As the report states: “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.” 

But that was just a repeat of past statements.  More important was the comment that the virus could impact the economy not just in the short-term but over the next two years as well (the medium-term). Indeed, the economic projections have the funds rate at 0.1% through 2022. 

And the Fed is confident that it can keep rates down for an extending period of time because recent experience.  Mr. Powell stated and restated in his press conference that despite unemployment rates at historically low levels for an extended period, inflation remained contained.  To me, that is saying that rates don’t have to go anywhere until we are at full employment and that could take years to reach. 

While the Fed has made it clear that rates will be low for a very long time, which is good for liquidity and equity prices, we have a long way to go before we get back to where the economy was before the pandemic hit.  The forecasts for economic growth over the next three years (-6.5% in 2020, +5% in 2021 and +3.5% in 2022) imply that we will not see GDP at where it was at the end of 2019 until roughly the middle of 2022 – two years from now!  The unemployment rate is still expected to be in the 5.5% range in the fourth quarter of 2022, compared to 3.5% in February of this year.  Those forecasts are hardly great for earnings, especially given how far the markets have come since the bottom in March.

So, when it comes to equities, investors need to ponder this key question: Will liquidity or economics reign?

 (The next FOMC meeting is July 28,29 2020.) 

KEY DATA:  Payrolls: +2.5 million; Private: +3.1 million; Restaurants: +1.37 million/ Unemployment Rate: 13.3% (down 1.4 percentage points); Unemployed: -2.1 million

IN A NUTSHELL:  “The road to recovery has begun.”

WHAT IT MEANS:  Boy, did we get it wrong.  It was expected that May would be the last month of really ugly employment numbers, but the moves to reopen came faster and stronger than anticipated.  Instead of another large decline in payrolls, the economy added 2.5 million jobs.  The restaurant sector, which was largely shuttered in March and April, started to reopen in May and added the most numbers of workers.  With take-out turning into eat-in this month, those gains should accelerate. Keep in mind, in February, there were 12.3 million workers in this sector but in May, the total was still only 7.6 million, meaning a lot of workers still need to be rehired.  Big increases were also seen in construction, retailing, manufacturing, health care and administrative services.  As far as weak links go, the major one was state and local governments, which cut over 570,000 workers.  The education sector was decimated and that raises serious concerns for schools in September.  As for the private sector, airlines continued to reduce employment significantly.  One final note: Despite the large addition to payrolls, there were still 19.6 fewer jobs in May than in February.  That is the hole we have to dig out of.

On the unemployment front, the news was way better than expected as well.  Despite the large number filing for unemployment insurance in May, the callbacks overwhelmed the layoffs and the unemployment rate dropped.  Keep in mind, the rate is still nearly ten percentage points above where it was in February and well above the 10% peak during the Great Recession, so we have a long way to do to get back to where we were.  The number of people employed rose by nearly four million, half of those coming from the unemployed rolls and half from people who had dropped out of the labor force.  Though the so-called “real” unemployment rate remained above twenty percent, about a third of that rate came from workers employed part-time for economic reasons. That could be due to the partial re-opening of restaurants.  The move back toward at least some eat-in arrangements should cut into that number sharply in the months to come. 

IMPLICATIONS:  The reopening of the economy is starting and the first clear sign is in employment.  Given the massive and widespread shut downs, it was assumed we would see some really big increases, it’s just that they started happening a month earlier than expected.  Don’t be surprised if the June report is even better.  Thus, those who forecast a third quarter economic decline of up to forty percent will likely be revising their numbers dramatically.  I was near the bottom of the panels with -22%, but that may be too large.  However, we knew that the first few months of recovery would be really robust.  That it came in May and June instead of later is a timing issue.  Instead of an historic, massive decline in the second quarter, it will be only huge.  That means the third quarter growth rate will be large not massive. 

I have argued over the past few months that what matters is not the third quarter growth rate but what happens once we get past the initial phase of re-openings and government supported hiring and income supports.  That is, once the economy has to stand on its own.  The continued high levels of unemployment claims and the likelihood of continued cut backs in government payrolls argues that we have to be cautious about thinking we can get back to the pre-virus shutdown economy quickly.  The extra $600 per week unemployment add-on and the business subsidies are slated to end this summer and we saw in the income report that government transfer payments have supported income growth.  This report makes it harder to argue the government should go further into debt if the economy is already recovering.  Once government support is withdrawn, though, one critical driver of the recovery will disappear and that could slow growth.  Let’s be realistic, there will be a lot of firms that have been permanently damaged or who will be operating at lower levels than they were pre-virus for an extended period. You don’t shut down an economy for two months and think there will be no long-term impacts.  Let’s enjoy the fact that we are starting to recover and the short-term looks good, but the long-term path remains uncertain.