As President Donald Trump battles Covid-19, he faces another ill wind that could chill his re-election chances: a cooling economy. Subpar is the latest sign that the recovery, boosted by trillions in federal money this summer as the government fought to ward off a recession, is now losing steam.
The slowdown comes just a month before the presidential election. While not necessarily fatal for Mr. Trump — sinking job growth in the second half of 2012 didn’t stop Barack Obama from winning a second term in office — the slowdown is clearly a hindrance given that the president’shas been centered on his management of the U.S. economy and that the country is rebounding following an epic collapse.
Among the signs that economic growth is waning:
- U.S. employers added last month. That was down significantly from the nearly 1.5 million growth in employment in August. And it was nearly 150,000 jobs below expectations.
- Consumer spending rose just 1% in August, far less than the nearly double-digit increases early this summer.
- Personal income dropped nearly 3% in August, a sign that the end of enhanced federal employment benefits is taking a toll on Americans’ finances.
- An additional 837,000 individuals last week, down from the previous week, but still nearly triple the number who typically applied for jobless aid before the recession.
- Manufacturing also slowed in September, with one index of activity from the Institute of Supply Management dropping to its lowest level since November 2018.
- Overall economic growth, which likely surged in the third quarter, is expected to rise a much more modest 2.5% in the fourth quarter. That’s down from a consensus forecast of 10% just a few weeks ago.
“Job growth is moderating just as fiscal aid is expiring — a toxic cocktail,” wrote Kathy Bostjancic of Oxford Economics in a note to clients on Friday. Bostjancic told CBS MoneyWatch that she expects economic growth to drop significantly in the last three months of the year and that she sees “downside risk” ahead.
While the pace of growth is slowing, most economists don’t expect a so-called double-dip — when the economy emerges from a downturn only to quickly slip back into recession.
“All of the indicators are slowing,” said Jared Bernstein, an economist and former top aide to Vice President Joe Biden. “Not saying we are falling back into a recession — I am far more worried that we are downshifting into growth that is a slog and that will do very little to boost the earning standards of people stuck at the low end of the workforce.”
The September jobs report isn’t the last major piece of economic data that will be reported before the election. But the runway to get a lift is getting shorter by the minute. In late October, just days before the election, the government will report gross domestic product for the third quarter. The report is expected to show that GDP grew a robust 35% between July and October as the economy rebounded from its April nadir.
“There is enough internal momentum in the economy for it to continue to grow,” said Vincent Reinhart, a former top Federal Reserve economist and strategist at BNY Mellon. But he predicted that growth will be much slower for the rest of the year.
It seems the road back is likely to be a long one. Reinhart doesn’t expect economic activity to rebound to its pre-pandemic level until the end of next year or early 2022. That could change if Congress were to pass another round of stimulus, but Reinhart sees less motivationso long as the economy is growing.
More stimulus would boost growth, but Reinhart said that had to be weighed against the costs of adding to the country’s growing debt.
“You can call it partisan differences, but you can also call it a different assessment of costs and benefits,” he said. “We are at a point where the trade-offs are a lot harder to assess.”
The Wile E. Coyote Market/Economy – Forbes
The Wile E. Coyote stock market has now looked down. Nothing but air!
The “good news” data from the U.S. economy is all stimulus related. Without stimulus, Q3 GDP would have fallen double digits.
The economy has yet to face the oncoming eviction crisis in the rental markets and foreclosure tsunami in the commercial real estate market.
No matter how the economic numbers are presented, 22+ million unemployed tells you all you really need to know!
Nothing But Air!
Financial markets are tumbling as investors scramble for liquidity. Strange that this is occurring amidst all the upbeat economic news, not only at home, but abroad:
- China Q3 GDP: +4.9%
- Japan: Q3 IP: +8.8%
- U.S.: Q3 GDP: +33.1%
- Germany: Q3 GDP: +8.2%
- France: Q3 GDP: +18.2%
- Italy: Q3 GDP +16.1%
- Taiwan: Q3 GDP: +3.3%
- AAPL, FB, GOOGL, AMZN: all beat earnings estimates
Was this good news all priced in and then some? Are falling prices the result of nerves about U.S. elections? Or maybe, just maybe, markets have begun to recognize that there is trouble ahead in the economy! There has been recent commentary from the likes of Christine Lagarde, President of the European Central Bank, that the Eurozone economy “is losing momentum;” and from William Dudley, former President of the NY Fed that “the outlook for the [U.S.] economy is deteriorating.” Recent headlines in the financial media include:
- ·“States Are Facing Historic Cash Crisis” (WSJ, 10/29/20, A1)
- “The Fed is Really Close to Running Out of Firepower” (Bloomberg Businessweek, 10/28/20)
- “Mounting Unpaid Rent Risks U.S. Tidal Wave of Evictions” (WSJ, 10/28/20, A1)
- “Delinquent Mall Owners Face Foreclosures” (WSJ, 10/28/20, B6)
It appears that, like Wile E. Coyote, market participants finally looked down – Nothing But Air!
The reality is that only a handful of large tech stocks (AAPL, FB, AMZN, NFLX, GOOG, MSFT) have buoyed the S&P 500 index to a +4% total return YTD (10/29/20). The S&P 500 is a cap weighted index, meaning that companies in the index are given weight based on their total market value (market capitalization). If all the stocks in the S&P 500 are given the same weight (i.e., equal weighted), the YTD return is -5%, and, just counting the bottom 494 stocks (i.e., eliminating those six), the YTD return is lower than -7%.
As an aside, while the business media tells you the “total return” of the S&P 500 on a daily basis (includes price changes and dividend distributions), they never tell you the total return of issues in bondland. They only tell you the current yield. For example, the yield on the 10-year U.S. T-Note is 0.87%. That’s equivalent to just telling you the S&P 500 dividend yield (1.98%). So, just for the record, the YTD yield on the 30-year U.S. T-Bond is close to +20%!
Certainly, some of the market’s angst can be assigned to the very real possibility that there may not be certainty about the election outcomes (president and Congress) for several weeks. But it is the headlines cited above regarding the state of the economy that may be the most troubling of all, and that’s because the effects of the virus and the resulting economic consequences may be more immediately impactful to consumers and the economy than a few weeks of uncertainty over elections.
Given the second wave of COVID infections that appears to be upon Europe and the U.S. (especially in the northern (cooler) states), the markets may be discounting a longer-term bout with the virus. “Maybe it won’t be gone by spring; maybe it will be with us much longer; or maybe we will just have to figure out how to live with it.” These thoughts may just reflect the markets’ thinking.
Reality Behind the Data
After tanking 31.4% in Q2, the first pass at Q3 GDP shows a growth of 33.1%. Just that cursory look could lead one to think that we are out of the woods, or even that GDP has fully recovered and then some. Unfortunately, that isn’t the math. The denominator has changed. A 33.1% growth from a base that is 31.4% lower results in a GDP still -3.5% below the Q4/19 peak. And the only reason the nominal GDP actually grew by $409 billion in Q3 was because of the federal government’s stimulus packages. In fiscal 2019 (the 12 months ending 9/30/19), the federal budget deficit was $984 billion. For the fiscal year ended 9/30/20, it was 3,132 billion (i.e., 3.132 trillion), or 2,174 billion more. Much of that was the various stimulus packages. So, as you can see, the money drop was much larger than the ultimate economic impact. What happened to the rest? Consumers saved some, they paid off a large amount of debt, corporate cash balances rose, a good deal found its way into the financial markets… Without such stimulus, Q3 real GDP would have contracted an additional 10%-12% according to Wall Street Economist David Rosenberg.
Because of the nature of the political system, another stimulus package has not yet arrived. Maybe one will, post-election, or maybe it will be delayed again if election outcomes are undecided. The original stimulus packages appear to have run their courses. There is an emerging realization that the significant economic issues, outlined by those financial headlines noted above, have no quick or easy solutions, and at least one of the issues (evictions) has never been faced before.
The Oncoming Crises
- As told in the WSJ, state and local governments are facing the biggest cash crisis since the Great Depression. These units employ more than 19 million people. Are layoffs looming? This one appears dependent on the outcome of the elections with a split government not a favorable development.
- Moody’s estimates that 12.8 million renters are delinquent with an average owed of $5,400. That amounts to $70 billion. Many of these renters will be evicted once the eviction moratorium ends unless the federal government steps in. That could put people on the street, many of whom have no jobs. But, even if there is a new eviction moratorium package, any monies advanced to landlords on behalf of the renters will likely have to be paid back over time by the renters, which means future consumption for the renters will be lower. And since the marginal propensity to consume of landlords is lower than that of renters, future economic growth will be lower.
- There are major delinquencies in the commercial real estate sector (malls, strip malls, department stores…). When the foreclosure moratorium ends, the balance sheets of the banks that hold such paper (mainly the regional banks), REITs, and other forms of such debt (CMBS)
will take big hits. This hasn’t happened yet, but, it is inevitable. And it is doubtful that Congress will bail out the holders of such paper. In fact, the Fed’s most recent Beige Book had many such worrying comments.
There seemed to be some better news in the Department of Labor’s weekly employment news release (10/29/20) for the week ended October 24th. The state Initial Unemployment Claims (ICs) fell slightly from 761K to 732K.
When the Pandemic Unemployment Assistance (PUA) program ICs are added, there was hardly any downward movement in ICs (from 1.105 million to 1.091 million). The chart and table above show that while there has been a downtrend (right side of chart), the slope is quite shallow. Eight months into the pandemic crisis, we still have 1.1 million of new weekly claims (layoffs). That’s huge. Pre-virus “normal” is 200K (see left side of chart).
The Continuing Claims (CCs) chart also shows a mild downslope. But, much of the falloff in CCs is due to the exhaustion of benefits, not re-employment. Again, the chart says it all. Look left for the pre-virus levels, and right for the current 22.7 million unemployed (out of 160.1 million labor force participants). That calculates to an unemployment rate of 14%. Given that the 22.7 million number is low due to the exhaustion of benefits, the real unemployment rate is likely somewhere north of 15%!
- The Wile E. Coyote stock market is now looking down, and, sees nothing but air!
- The GDP numbers looks great, but on closer analysis they are still troubling. Furthermore, they are entirely based on fiscal stimulus. While we may get more such stimulus, the reality is that the patient is quite ill.
- A second wave of the virus has appeared in Europe and the U.S. While the number of deaths has not risen commensurately with the number of infections, it is now likely that the virus will impact economic activity for a much longer period than originally thought. The unemployed have been living on federal stimulus. Even with another dose, more than 22 million are unemployed and many will be facing evictions come the new year.
- Defaults have been suppressed, but these, too, are likely to be a big issue in 2021.
- 22+ million people are unemployed with few prospects. That says it all!!!
The Economy Is Down. Why Are Home Prices Up? – The New York Times
Many Americans will have heard stories about people fearful of the pandemic fleeing from crowded cities and driving up home prices in the rest of the country. But there is a much bigger tale to tell here.
Housing prices started rising before the pandemic arrived. They are rising on average in U.S. cities as well as in rural and suburban areas. They are increasing not just in the United States but also worldwide, regardless of how hard a country has been hit by the pandemic. And prices are at or near record highs not only for housing but also, despite recent market wobbles, for stocks and bonds.
This is a global market boom in the price of … everything.
The common factor is not the virus; it is so-called easy money. Led by the Federal Reserve in the United States, central banks have been lowering interest rates for decades, hoping to stimulate economic growth, but much of that newly issued money keeps flowing into financial markets. This unintended boost has accelerated drastically during the pandemic, as central banks roll out multi-trillion-dollar stimulus plans. According to my research, the valuations of stocks, bonds and housing have risen sharply this year to levels seen only around 2000 and 2008 — periods characterized by financial bubbles.
This is not good news for most people. Market manias have an alarming record of bringing down the wider economy and of widening wealth inequality. In 484 cities around the world whose home prices are tracked by Numbeo, which compiles user-generated data about consumer prices, home prices are now beyond reach for the typical family in more than 400 of them. The least affordable U.S. city is New York, where median home prices (despite falling during the pandemic) are still more than 10 times the median annual income.
Going back at least to the 1970s, housing had always slumped during recessions, both in the United States and worldwide. People lose jobs and stop dreaming of bigger homes. But in the second quarter this year, amid the worst global recession since the 1940s, housing prices were up a robust 4 percent worldwide, and that was before the boom really took off. Since May, new-home sales in the United States have climbed by 67 percent, and prices by 15 percent. The median price of existing homes in the United States recently passed $300,000 for the first time.
This surreal “boom in the gloom” is a government creation. As central banks flooded money into the credit markets, rates on 30-year mortgages, which had been falling for years, plummeted to record lows — under 3 percent in the United States and under 2 percent in Europe. If you are dreaming of riding out the pandemic in a larger home, cheap mortgages now beckon you to act.
For now, housing is a bright spot in a struggling economy. But when prices are shaped by easy money, as much or more than by genuine demand, the result is often a severely skewed allocation of resources. Already, many investors are buying homes not as a shelter but as an alternative to stocks and bonds, which are even pricier.
The risk going forward is that the boom will leave more people unable to afford a home and that prices will eventually reach dangerous bubble levels. And when booms go bust, it takes time to unravel the bad debts, which ripple through the middle class, lengthening and deepening the resulting recession.
The response favored by many experts, including some Fed officials, is tighter regulation. But if regulators clamp down on mortgage lending, investors will borrow to buy something else — stocks and bonds, or even fine art, rare wines or some other exotic asset. When borrowing is nearly free, tweaking regulations will only shift money from one market to another.
For years, central banks said there was no reason to tighten monetary policy because there was no inflation. But as many economists have argued, there appeared to be no inflation because official indexes don’t adequately capture asset prices. The United States, for example, includes only rent and a “rental equivalent” for home prices in its official indexes, which makes them increasingly misleading: Rents have lagged behind home prices for years and have slumped further during the pandemic, pushing the official inflation rate even lower.
Central banks need to take the menace of asset price inflation more seriously and to give the threat of stock, bond and especially housing bubbles more weight in their policy deliberations. This would not prevent central banks from bailing out an economy in crisis, when other concerns prevail. But once a recovery begins, it would nudge central bankers to start shutting off the easy money spigot a bit earlier than they otherwise would have — before an “everything boom” like this one becomes a full-blown bubble.
Ruchir Sharma is the chief global strategist at Morgan Stanley Investment Management, the author, most recently, of “The Ten Rules of Successful Nations” and a contributing opinion writer. This essay reflects his opinions alone.
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Canadian economy caps strong third quarter before slowdown – BNN
Canada’s economy recorded what are likely its last strong months of growth in August and September, as the country braces for an end-of-year slowdown.
Gross domestic product expanded 1.2 per cent in August, Statistics Canada said Friday in Ottawa. The agency also released a preliminary estimate for September, which showed a 0.7 per cent expansion — a fifth straight month of historically elevated readings as the economy rebounded from a sharp contraction from the COVID-19 lockdowns.
With September figures in, the data suggest the economy grew 10 per cent in the third quarter, the agency said, implying about 46 per cent growth on an annualized basis — which would be an all-time high.
“The numbers are solid overall,” David Doyle, an economist at Macquarie Capital Markets, said by email.
But things will get much slower from here. This week the Bank of Canada projected annualized growth of only one per cent in the final three months of the year, and reiterated expectations for a drawn out recovery over the next several quarters.
Canada’s currency appreciated slightly on the report, rising 0.2 per cent to $1.3295 against the U.S. dollar at 9:07 a.m. Toronto time. The yield on government two year bonds was little changed at 0.25 per cent.
The numbers suggest economic activity in September was about 96.1 per cent of output levels in February.
Economists were expecting 0.9 per cent growth in August, according the the median forecast in a Bloomberg survey.
Warmer weather, lower virus counts and mass re-openings encouraged a surge in retail spending between July and September. In addition, pent-up demand for housing led to a boom in construction and real estate in the third quarter.
The September reading is still a “solid starting point” for the fourth quarter, Derek Holt, an economist at Bank of Nova Scotia, said by email. He estimates a fourth-quarter gain of 3.5 per cent annualized, compared with the Bank of Canada’s one per cent estimate.
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