The employment data for November were downbeat, and those surveys were taken prior to many newly imposed restrictions including stay-at-home orders.
Other economic data, including Black Friday-Cyber Monday spending, and manufacturing and service indexes also disappointed. Pessimism also showed up in the Fed’s recent Beige Book, its survey of business sentiment.
Yet, despite all the downbeat economic news and forecasts, equity markets set new all-time highs the week ended December 4th. They are marching to a drummer that has little to do with underlying economics.
A No-Grinch Season Despite COVID
We took our nearly three-year-old granddaughter on a car ride through the residential areas to see Christmas light displays on local homes. At nearly three, this is the first year of some understanding of the concept of Santa, and anticipation of the arrival of Christmas Day. And, we weren’t disappointed; in fact, quite impressed. Despite stay-at-home orders, business restrictions, and worry about the pandemic, or perhaps because of it, people have put great effort into decorating their homes for the season. I can’t remember seeing so many homes decorated so lavishly. No COVID-Grinch is going to steal this season!
Similarly, despite what could turn out to be a double-dip recession in the economy, equity markets are having none of it.
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The big story for the week was in the labor market data. The headline Establishment (Payroll) Survey only rose +245K; the consensus was for a rise of more than 440K. The table shows the clear decelerating trend in this indicator since June:
I have been writing about the coming labor market slowdown since the surge in the virus caused renewed business restrictions. We are now seeing this play out. Likely the downtrend has more legs, as many more business restraints have been promulgated since the employment survey period (November 9th to 13th).
The sister Household Survey, from which the unemployment rates are calculated, showed that net new jobs fell -74K for the November survey period (nary a report of this in the business media). True, the unemployment rate (U3) fell, as per consensus, from 6.9% to 6.7%, but that was perversely due to a shrinkage of -400K in the labor force. So, it was the lower denominator, the labor force, not the numerator, the number employed, that lowered the unemployment rate. Not what the consensus thought. Worse, according to Economist David Rosenberg, the shrinkage in the labor force since February is the largest on record (records kept since 1948). [In February, the labor force numbered 164.2 million. In November, it was 160.5 million. That means 3.7 million people who had a job, or were looking in February, have simply given up and dropped out. They are no longer counted in the unemployment data, but they should be. That would add 2.3 percentage points to the U3 rate.]
A couple of charts shed more light on the deteriorating employment data. The first of these is the number of unemployed for 27+ weeks. That number is now near four million.
Once in this category, the tendency is just to give up (thus the rising number of labor force drop-outs discussed above). And analysis shows that the long-term unemployed become less and less marketable. As this number rises, we can expect to see the labor force continue to shrink in the coming months, perhaps at a faster rate than it has done since February. This is going to be a real economic and political issue going forward.
The next chart shows the number of “permanent” job losers, people whose jobs have simply been eliminated, is now about 3.75 million. Back in February, these employees were told that they were “temporarily” on furlough. But, as the pandemic has lingered, employers have either closed or restructured, and their jobs simply disappeared.
There are two unemployment assistance programs: the regular state programs and the PUA (Pandemic Unemployment Assistance), created by the CARES Act (and scheduled to disappear on December 31st without Congressional action – now expected). The data show some improvement for the week of November 28th, most likely because of the exhaustion of eligibility, not because of an improving jobs market. Note that the data for the two programs, nine months into the pandemic is still in-excess of a million (see chart). This is a measure of weekly layoffs! And if we look at Continuing Claims, i.e., people who have been collecting for more than a week, the total of state and PUA claims remain in-excess-of 20 million! (see chart) The slight downtrend in this chart, too, is more likely due to benefit exhaustion than an improvement in the job market. So, the charts, dire as they are, likely understate the true picture.
The sad truth is that there isn’t any encouraging published employment data. The monthly ADP survey showed +307K for November, similar to the Payroll Survey (+245K). In September, ADP’s number was +754K. Challenger, Gray, and Christmas said they saw nearly 65K pink slips in November, the most, they said, for any November since 2008. And remember, most of these surveys were taken in early to mid-November. Since then we’ve seen added restraints on businesses throughout the country. In California, we now have stay-at-home orders.
There is the burning question of whether-or-not there will be additional government support prior to the December 31st termination of the CARES Act programs. The latest PUA data, week of November 14th, shows 8.9 million on the regular PUA program and 4.6 million on the “Emergency” program. That’s 13.5 million. The expectation here is that there will be an extension. Unfortunately, the current model is to a) borrow from the future (i.e., not require any work or repayment, but just gift the funds), and b) to give more than the individual was making in their old job. Precisely for this reason, we see many reports, including in the Fed’s Beige Book, of employers not being able to find employees despite the record number of unemployed.
A Cautionary Note: When the CARES Act was passed, the pandemic was expected to last a couple of quarters. Certainly, it was thought, that it would pass by year’s end. But, as we all realize, it may yet linger for several more quarters. The result is that consumers may be a lot less likely to quickly spend any new or extended benefits. And, the fact that the vaccines are coming may actually discourage economic activity, as consumers “play-it-safe” while waiting for their number to be called in the vaccine lottery.
There are other economic indicators besides the labor data. Almost all these, too, are downbeat:
- The amount of money consumers spent between Thanksgiving and Cyber Monday dropped -14% Y/Y. There was a big shift to on-line sales (+8% Y/Y) but it wasn’t enough to offset the -37% fall in in-person transactions.
- The ISM Manufacturing Index, while still positive at 57.5 in November was lower than October’s 59.3 and disappointed the consensus estimate (58.0). The employment sub-index was 48.4 (Nov.), showing contraction vs. 53.2 (Oct.). (50 is the demarcation between expansion and contraction.)
- The ISM Non-Manufacturing Index also fell in November (55.9 vs. 56.6). Like the Manufacturing Index, this was still positive, but definitely showing signs of deceleration.
- The Fed’s Beige Book, a compendium of business sentiment in the 12 Federal Reserve Districts said that “four districts described little or no growth” and “three of the four Midwestern Districts observed that activity began to slow in early November as COVID-19 cases surged.” Again, remember that these observations are from early November, prior to the renewal of business restraints.
- Even Southwest Airlines, a company that has NEVER had a single layoff, said it possibly could furlough 6,800 to cut costs.
- On the financial side, the Beige Book reported that “Contacts in numerous Districts reported some deterioration of loan portfolios, particularly for commercial lending into the retail and leisure and hospitality sectors. An increase in delinquencies in 2021 is more widely anticipated… many contacts cited concerns over the recent pandemic wave, mandated restrictions (recent and prospective), and the looming expiration dates for unemployment benefits and for moratoriums on evictions and foreclosures.”
If, on an MBA examination, a student was only given the above data for the state of the economy, and nothing else, and asked to predict how the equity market would perform, any student indicating new record highs would likely receive no credit for such an answer. Yet, every one of the major indexes closed at new all-time-record highs on Friday, December 4th (DOW: 30,218; S&P 500: 3,699; Nasdaq: 12,464). Possible explanations?
- Perhaps markets were looking through the abyss to the other side, especially since there are now at least three viable vaccines. A return to “normal” could be “close at hand.”
- Horrible employment data: Normally, Friday’s employment data, along with the clear deceleration in economic activity, would have knocked the equity markets for a loop. But No! That poor employment data was seen spurring the Congress to quickly move to break the political logjam and provide more stimulus (e.g., helicopter money!). Markets love stimulus!
The truth is, the equity market has been divorced from Harry Markowitz’s Capital Asset Pricing Model (CAPM) (yes, the one taught in every MBA program in the country) since Bernanke unleashed the original Quantitative Easing program. (By the way, Markowitz was awarded the Nobel Prize in Economics in 1990 for the CAPM.) Or, perhaps it was Greenspan’s protection of financial markets that decoupled CAPM from Mr. Market (i.e., the “Greenspan Put”).
Equity markets are hooked on easy money, and easy money is what the Fed, the Congress, and nearly every politician wants. M2, for example, is up 25% Y/Y. And, now, as if deficits and debt weren’t simply awful in a Republican Administration, it appears that we are about to unleash the official acceptance of “Modern Monetary Theory” (MMT) (i.e., a sovereign nation can print as much money as it wants), an abomination of an economic theory, but something acceptable to the political class, as they won’t have to defend debt and deficit spending anymore.
Someday, economic fundamentals will again mean something. Likely, not tomorrow. The money printing game is going to continue for the foreseeable future. And markets are going to respond accordingly. What event or series of events precipitates the return of economic fundaments is unknown. Neither is the timing. For the investor class, “vigilance” should be the new operative watchword.
Source: – Forbes
Northern Development reports unexpected pandemic related benefits to Northern BC's economy – mycariboonow.com
(Files by Dione Wearmouth-MyPGNow)
According to the report, the overall impact of COVID-19 has been more moderate in the North as the region’s economy doesn’t depend as heavily on hospitality and recreation.
“Our economy in the North is more traditionally on industries like mining, forestry, oil and gas and clean energy,” explained Joel McKay, CEO of Northern Development, “and those particular sectors weren’t hit as hard by the shutdowns involved with the pandemic.”
Since there are fewer service-sector jobs that were heavily impacted by the changing provincial health guidelines, the North was better off than other areas of the province.
The forestry sector managed to do surprisingly well in the North throughout 2020, as the pandemic presented a unique opportunity to the sector.
“Once COVID hit, a lot of people at home took on home improvement and renovation projects and housing starts remained relatively strong, both of which are key indicators of the lumber being manufactured in BC,” noted McKay.
This led to the price of lumber reaching a record high last summer.
This comes after a particularly hard 2019 for forestry, as nine mills closed permanently in Northern BC, resulting in over 1,000 lost jobs.
According to the report, lumber prices are expected to remain relatively high through the end of 2020 and into 2021.
McKay also explained that major energy projects including Site C, Coastal Gaslink projects and the LNG Canada site had a major impact on the North’s economy last year.
“The multi-year construction horizon, the thousands of workers, all the companies and businesses in places like Prince George that are working to support the construction of those projects meant that there was money flowing in the North,” he explained, “which saved the North’s economic bacon.”
Even though the tourism and hospitality sectors didn’t see as many visitors in 2020, there were many construction workers that came and supported businesses such as restaurants and hotels.
“These three projects are expected to bring people to spend money in the North for the next 4 to 5 years,” McKay added.
Commodity prices for some base and precious metals such as copper spiked as well, which presented an opportunity for the mining industry to thrive in the North.
“That’s driving renewed interest in exploration activity and also some projects that are well established could also start being built for the first time,” McKay added, “we single out the Blackwater project south of Vanderhoof in the report.”
He explained that the Blackwater project could create significant long-term construction jobs filled by people that will spend money on hospitality businesses in the North.
Even though 2020 presented some significant opportunities for economic development in the North, the report explained the region will continue to face economic challenges for some time.
Indian economy to get shot in the arm from federal budget: Reuters poll – TheChronicleHerald.ca
By Tushar Goenka and Shaloo Shrivastava
BENGALURU (Reuters) – India’s path to economic recovery will be stronger than previously thought as fiscal expansion and vaccine hopes help the country heal from COVID-19, a Reuters poll of economists showed.
The world’s second-most populous country has begun a huge vaccination drive and a steep fall in new coronavirus cases over the past few months is supporting a recovery in Asia’s third-largest economy.
Alongside that, nearly 60% of respondents, 18 of 31, who responded to an additional question in the Jan. 13-25 poll said India’s federal budget, due on Feb. 1, would help a significant economic recovery in financial year 2021/22 and has already sent stocks to record highs.
“We expect global economic activity to return to normality in fiscal Q2 and India to grow in fiscal 2021/22, with government stimulus packages expecting to contribute,” said Hugo Erken, head of international economics at Rabobank.
“There is a strong sentiment the budget will aim to continue expenditure as growth is the only way India can come out of recent setbacks.”
The poll of over 50 economists showed the economy would grow 9.5% next fiscal year – the highest since polling began for the year in March 2020 – after contracting 8.0% in the current fiscal year.
It was expected to grow 6.0% in fiscal year 2022/23. The poll predicted the economy would grow 21.1%, 9.1%, 5.9% and 5.5% in each quarter of the 2021/22 fiscal year, largely upgraded from a poll taken two months ago.
But when asked how long it would take for the economy to recover to its pre-COVID-19 level, 26 of 32 respondents said it would take up to two years, including six analysts said longer than that. Twelve analysts said within a year.
“There is a lack of fiscal space to boost growth sufficiently and India is unlikely to reach its pre-COVID-19 levels any time soon despite policy support,” said Sher Mehta, director at Virtuoso Economics.
“Economic momentum will struggle to gain traction as there are fears of stagflation and the possible end of monetary policy easing.”
The Reserve Bank of India, which has slashed its main repo rate by 115 basis points since March 2020 to cushion the shock from the coronavirus crisis, was expected to keep its benchmark lending rate at 4.0% through at least 2023.
That was a shift in expectations from a survey taken two months back when a 25 basis point cut to 3.75% was predicted in the April-June period.
WILL BORROW MORE
India’s government will focus on fiscal expansion in next week’s budget and revise its borrowing target higher for the 2021/22 fiscal year, prompted by the expected economic slowdown and weak jobs growth, according to the latest poll.
Government borrowing has ballooned due to pandemic spending while revenues have severely dampened.
The median forecast showed the government would revise its fiscal deficit target for next fiscal year up to 5.5% from 3.3% of gross domestic product.
Around 55% of economists, 18 of 33, who answered an additional question about the focus of the budget said it would be more on fiscal expansion than prudence.
“Tight fiscal policy can do lasting damage by hurting potential growth that would have been negatively affected on account of the pandemic,” said Abhishek Upadhyay, senior economist at ICICI Securities PD.
(For other stories from the Reuters global long-term economic outlook polls package:)
(Reporting by Tushar Goenka and Shaloo Shrivastava; Polling by Vivek Mishra and Md. Manzer Hussain; Editing by Jonathan Cable and Steve Orlofsky)
Consumer Confidence in US Improves on Outlook for Economy – BNN
U.S. consumer confidence rose in January as Americans grew more upbeat about the outlook for the economy and job market in light of further fiscal aid and the distribution of coronavirus vaccines.
The Conference Board’s index of sentiment increased to 89.3 from a revised 87.1 reading in December, according to a report on Tuesday. The median forecast in a Bloomberg survey of economists called for a reading of 89.
The gauge of expectations rose to a three-month high of 92.5, while a measure of sentiment about current conditions decreased to 84.4, the worst reading since May.
The overall improvement in sentiment follows last month’s passage of a US$900 billion aid package and coincides with a proposed US$1.9 trillion in additional stimulus. While the confidence index remains well below pre-pandemic levels as the health crisis prompts tighter restrictions on activity, a more widespread roll out of the vaccine and additional financial assistance could shore up sentiment.
“Consumers’ appraisal of present-day conditions weakened further in January, with COVID-19 still the major suppressor,” Lynn Franco, senior director of economic indicators at the Conference Board, said in a statement. “Consumers’ expectations for the economy and jobs, however, advanced further, suggesting that consumers foresee conditions improving in the not-too-distant future.”
The number of Americans that said jobs were currently hard to get increased to the highest level since May, underscoring a rocky labor market. The cutoff date for the preliminary results was Jan. 14.
Still, the share of survey respondents who said better business conditions in the next six months increased to a three-month high of 33.7 per cent from 29.5 per cent. The share anticipating more jobs during that period climbed to 31.3 per cent, also the highest since October.
At the same time, a little more than two-thirds see their incomes remaining flat in the next six months, while the rest of respondents were about evenly split on whether their wages will rise or fall.
Respondents indicated they were more likely to make big purchases in the months ahead. The share expecting to buy a new car increased to 10.7 per cent from 9.8 per cent, and more said they intended to buy a home.
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