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.