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.