The good news is that a vaccine is definitely coming. But getting to herd immunity is going to take more than a quarter or two, especially given the resistance of about half of the American population to getting the vaccine, at least early on.
The economy is likely to remain soft until well after the pandemic passes. There are many reasons for this including a decade of poor policymaking and financial engineering. No doubt, there are going to be winners, most likely in the stay-at-home, e-commerce, and technology/communications spaces.
The climate in Asia, especially China, appears to be more attuned to fostering growth than most western countries, including the U.S.
Trends and Headlines
· “Number of Patients in Hospitals Skyrockets,” Wall Street Journal (WSJ), 11/18/20, A7, “US Covid-19 Deaths Top 250,000 As Hospitalizations Strain System,” WSJ, 11/19/20, A7. There were more than one million new cases of the virus in the U.S. in the middle week of November.
· With the new virus outbreak, business restrictions are being re-imposed. CA imposed a 10 pm to 5 am curfew statewide. NYC closed its schools (online only) and placed new restrictions on restaurants, bars and gyms. New Mexico and Michigan also enacted new restrictions. NYC’s MTA expects a renewed decline in subway, bus and train ridership of 40%-50% and is prepared to lay off nearly 9,400 workers. For affected businesses, increased layoffs have already begun.
· 90% of the S&P500 currently trade above their 200 day moving averages. That is really rarified air. Investors must be looking beyond the abyss. Or maybe they don’t yet recognize the irreparable economic damage that has already occurred. Back in ’09, there was a similar light at tunnel’s end. It was called TARP. But between TARP-1 and TARP-2, despite Fed rampant easings, the S&P500’s downdraft was 30%. Wile E. Coyote better not look down!
· Retail sales (+0.3%) missed expectations (+0.5%) in October. September was revised down by -0.3%, so, on net, sales were flat as a pancake. Core retail (excluding auto sales, gas, building materials…) rose +0.1%, but since September was revised down by -0.5%, this is a big negative on net.
· Industrial Production rose +1.1% in October. One would interpret this as good news, and it is likely that manufacturing is holding its own. But the Federal Reserve Regional Indexes foresee a different story for November’s reading.
- NY Fed Empire Index: 6.3 November vs. 10.5 October
- KC Fed Index: 11 November vs. 13 October
- Philly Fed Index: 26.3 November vs. 32.3 October
· “Retailers Are Facing a Holiday Grinch,” WSJ, 11/18/20, B14. The seasonal adjustment factors for November/December expect huge holiday spending. This is not likely given the continuing high levels of unemployment, layoffs, job insecurity, the resurging virus, and today’s political uncertainties.
· An exception in the world, as far as economic growth is concerned, is China and Asia. They are largely over the virus because they implemented effective controls. Foreign money is pouring into the Chinese economy, not into their real estate market, as in the past, but into their IT, communications, and e-commerce sectors. Perhaps looking toward investing there might be a good idea.
· Zombie Companies, those that can’t cover debt-service payments from internally generated cash flows, now comprise 17.5% (527) of the largest 3,000 companies (Bloomberg), up from 11.2% (335) at the end of 2019.
These companies, with the aid of the Fed, added $1 trillion of debt since the beginning of the pandemic and their total debt now stands at $1.36 trillion (vs. $378 billion as of 12/31/19) or 3.6x larger. No wonder the bankruptcy cycle has flattened. And while the Fed has supported such zombies, a WSJ (11/18/20, A3) headline reads: “Federal Dollars Couldn’t Stave off Bankruptcy for Hundreds of Firms.” The article says that 300 companies that received $500 million in pandemic related government loans filed for BK, and that many other that also received funding didn’t file, they simply shut down.
A Decade of Poor Policy
Since the Great Financial Crisis, much of the “wealth creation” in the U.S. has been via financial engineering and debt creation. Much of corporate policy has been aimed at the company’s stock price with new debt used for stock buy-backs instead of for organic growth via investment in plant and equipment and expansion. Fiscal and monetary policies have been used to save “zombie” companies instead of the “creative destruction” that has been a trademark of U.S. capitalism for the past 150 years.
The weekly Department of Labor unemployment data are now showing deterioration as the virus resurges and business restrictions are reimposed. State Initial Claims (ICs) rose in the week ending November 14th to 743K from 725K. They also rose in the special Pandemic Unemployment Assistance program (PUA) to 320K from 296K. Combining the two, we see that new weekly layoffs remain north of 1 million (1.06 million the week of November 14 vs. 1.02 million the prior week).
Many of the CARES Act emergency programs end on 12/31/20. And, Treasury Secretary Mnuchin has told Fed Chair Powell that the Treasury will stop funding the Fed loan programs at year’s end. At least 12 million people are facing the end of unemployment support after 12/31. The Census Bureau (October 26th report) indicates that 14 million renters are at risk as rent moratoriums end, and that 2.7 million homeowners (November 8th report) are at risk of foreclosure.
Besides the exhaustion of benefits in the state programs (normally 26 weeks), the PUA programs also close at the end of the year. Unless there is a new stimulus plan soon, not likely given the political vitriol now in play, the negative impact in Q1 is likely to be dramatic. In my view, in anticipation of an end to such programs, Q4 consumption is also likely to be lower. Wile E. Coyote – don’t look down!
Housing – Single Family, A Winner in Some Places
Single-Family housing starts were 1.18 million (Annual Rate), the highest level since April ’07 and now up six months in a row. The last time this happened was in ’05, and before that all the way back to ’82! Over that six months, single-family starts are up more than 30%. In contrast, over the same period, multi-family starts are down more than -6%. Year over year, single family starts have risen 29%, multi are down -18%. Clearly, the virus has caused a shift in preferences for less density and more privacy and space. This is likely the trend for the post-virus world with Work-From-Home sending the post-virus demand for office space deep into recessionary territory.
However, when you look at housing by region, it is clear that there is an exodus from the Northeast (NY, NJ, CT, MA…). The following table shows the data for housing starts by region:
Breaking down housing starts in the Northeast, October vs. September, single-family starts were down nearly -18%, while multi-family were off a whopping -85%. Can’t blame the weather; for most of October the weather was unseasonably mild. So what is happening? Living costs, including the cost of housing and significantly rising levels of taxation in the region, along with the newly found ability to Work-From-Home, or simply work elsewhere, appear to be at work here. This looks like an emerging new trend.
Everywhere I go, I see help-wanted signs. From what I read and from anecdotal experiences, companies appear to be unable to find entry level workers. In addition, more and more skilled and semi-skilled positions go unfilled. Yet, as discussed in this blog since April, we have record levels of unemployment, with concentrations in the lower wage earning groups (leisure/hospitality, retail…). Here is a non-exhaustive list of reasons we are seeing this employment disconnect in the U.S.:
- Those laid-off are from different sectors than where current needs are. For example, recently laid-off leisure/hospitality or retail workers aren’t likely to look for manufacturing jobs or jobs on a plant floor;
- Unemployment benefits, which are now starting to expire, are a disincentive for people to re-engage, especially when they are generous or even higher than can be earned in available employment;
- Many are still waiting to be recalled. It is easier to go back to a job one has had and knows than it is to find a new and different one, or to start at the bottom if one has had some promotion at the old employer.
How long this disconnect lasts is unknown. Existing support programs expire at year’s end. Whether or not another stimulus occurs in the “lame-duck” period between Administrations is anyone’s guess. Likely, the next Administration will have a stimulus, but what it might look like and whether or not it depresses the need for employment like the CARES Act did is anyone’s guess. Much of the employment dislocation appears to be “permanent,” or, at least, “semi-permanent,” i.e., a leisure/hospitality worker is unlikely to end up as a plant floor worker.
Future consumer behavior has been permanently changed by the pandemic with the undoubted result being an increased savings rate. (The demographics of an aging population only reinforce this.) Higher savings, higher unemployment and employment dislocations imply slower future economic growth. Don’t expect that, once we have endured the near-term economic pain and get to the other side of the pandemic, economic growth will return to “normal” (which was less than 2%/year since the Great Recession). In order for the equity market to continue its upward march, underlying fundamental ratios will have to rise above even current lofty levels. While possible, probability says otherwise. Nevertheless, there are always winners. It’s just a matter of identifying them before everyone else does.
Biden's rescue plan will give U.S. economy significant boost: Reuters poll – TheChronicleHerald.ca
By Indradip Ghosh and Richa Rebello
BENGALURU (Reuters) – U.S. President Joe Biden’s proposed fiscal package will boost the coronavirus-hit economy significantly, according to a majority of economists in a Reuters poll, and they expect it to return to its pre-COVID-19 size within a year.
Biden has outlined a $1.9 trillion stimulus package proposal to jump-start the world’s largest economy, which has been at the epicenter of the COVID-19 pandemic having lost over 400,000 lives, fueling optimism and sending Wall Street stocks to record highs on Thursday.
Hopes for an upswing in U.S. economic growth, helped by the huge stimulus plan, was reflected in the Jan. 19-22 Reuters poll of more 100 economists.
In response to an additional question, over 90%, or 42 of 46 economists, said the planned fiscal stimulus would boost the economy significantly.
“There are crosswinds to begin 2021 as fiscal stimulus helps to offset the virus and targeted lockdowns. The vaccine rollout will neutralize the latter over the course of the year,” said Michelle Meyer, U.S. economist at Bank of America Securities.
“And upside risks to our…growth forecast are building if the Democrat-controlled government can pass additional stimulus. The high level of virus cases is extremely disheartening but the more that the virus weighs on growth, the more likely that stimulus will be passed.”
For a Reuters poll graphic on the U.S. economic outlook:
The U.S. economy, which recovered at an annualized pace of 33.4% in the third quarter last year from a record slump of 31.4% in the second, grew 4.4% in the final three months of the year, the poll suggested.
Growth was expected to slow to 2.3% in the current quarter – marking the weakest prediction for the period since a poll in February 2020 – amid renewed restrictions.
But it was then expected to accelerate to 4.3%, 5.1%, 4.0% in the subsequent three quarters, a solid upgrade from 3.8%, 3.9% and 3.4% predicted for those periods last month.
On an annual basis, the economy – after likely contracting 3.5% last year – was expected to grow 4.0% this year and 3.3% in 2022, an upgrade from last month.
For a graphic on Reuters Poll – U.S. economy and Fed monetary policy – January 2021:
Nearly 90%, or 49 of 56 economists, who expressed a view said that the U.S. economy would reach its pre-COVID-19 levels within a year, including 16 who expected it to do so within six months.
“Even without the stimulus package, we had already thought the economy would get back to pre-COVID levels by the middle of this year,” said Jacob Oubina, senior U.S. economist at RBC Capital Markets.
“With the new stimulus package there will be more direct money in people’s pockets, easily boosting the economy, provided a vaccine rollout progresses in a constructive manner.”
But unemployment was not predicted to fall below its pre-pandemic levels of around 3.5% until 2024 at least.
When asked what was more likely for inflation this year, only one said it would ease. The other 40 economists were almost evenly split between “a significant pickup” and price pressures remaining “about the same as last year.”
Still, the core Personal Consumption Expenditures (PCE) price index – the Federal Reserve’s preferred inflation gauge – was forecast to average below the target of 2% on an annual basis until 2024 at least, prompting the central bank to keep interest rates unchanged near zero over the forecast horizon.
“I don’t think it will be an increase in underlying (inflation) trend, it is sort of a rebound in prices that have been depressed during the pandemic,” said Scott Brown, chief economist at Raymond James.
(For other stories from the Reuters global long-term economic outlook polls package:)
(Reporting by Indradip Ghosh and Richa Rebello; Additional reporting by Manjul Paul; Polling by Mumal Rathore; Editing by Rahul Karunakar and Hugh Lawson)
The U.S. economy likely grew 4.1% at the end of 2020, but GDP seen masking weakness in some sectors – MarketWatch
The U.S. economy may have grown about 4% in the final three months of 2020, a great showing even in the best of times.
These are not the best of times.
The economy still has lots of ground to make up, for one thing, after the deepest recession on record. And growth slackened off toward the end of 2020 after the coronavirus pandemic roared back and caseloads reached a record high, pointing to a loss of momentum in the economy early in the near year.
The U.S. fourth-quarter report on gross domestic product, due on Thursday, will still offer a useful diagnosis of the economy. It will tell us which parts have mostly recovered and which are still ailing.
economists polled by the Dow Jones/The Wall Street Journal predict a 4.1% increase in fourth-quarter GDP on an annualized basis. While that would mark a steep drop from the 33.4% increase in the third quarter, it still shows the economy forging ahead even as the coronavirus pandemic spiked again.
The details are unlikely to look quite as good.
The biggest component of the U.S. economy, consumer spending, almost certainly softened to mediocre 3% growth or less. Most government aid for the economy had faded away by the start of the quarter and businesses facing new government restrictions laid off more workers at the end of the year.
Business investment in structures such as oil rigs or office buildings was also weak.
Other drags on the economy included lower state and local spending and a bigger international trade deficit.
The economy got some sizzle from a surprising boom in the housing market. Low mortgages rates and people seeking more space outside the cities have lifted sales of previously existing homes to a 14-year high.
Businesses also started to rebuild their inventories — goods for future sale, that is — after letting them draw down early in the pandemic. That’s a good sign for 2021 since it suggests companies are expecting stronger sales.
Indeed, a pair of surveys of business executives in January suggest companies are banking on a better 2021, mostly because of rollout of coronavirus vaccines.
How soon the vaccinations levels are high enough to really help the economy, however, is still an open question.
“We only expect vaccination rates to be high enough to accelerate the economic recovery from mid-2021 onward,” said Cailin Birch, global economist at The Economist Intelligence Unit.
The promise of more federal financial aid from the Biden White House is also adding to the optimism, but the stimulus could take awhile to reach households and businesses. It’s also unclear how much aid Congress will approve.
What could also help the economy after a rocky start in the new year is rising consumer confidence. Americans historically spend more when they are confident and push the economy to greater heights.
A pair of surveys this coming week, consumer confidence and consumer sentiment, will give another glimpse into whether the hopes inspired by the vaccines are outweighing the angst caused by the record number of coronavirus cases.
Biden Seeks to Juice Economy as Congress Spars Over Stimulus – BNN
(Bloomberg) — President Joe Biden is discovering the limits of his power to boost the world’s largest economy on his own, as congressional opposition to his sweeping stimulus plan hardened soon after he was inaugurated.
While publicly urging Congress to swiftly pass his $1.9 trillion proposal — warning of rising unemployment, hunger and homelessness if lawmakers don’t act — Biden issued more than a dozen executive actions in his first three days in office, some aimed at propping up the economy and containing the coronavirus to allow its reopening.
While moderate Republicans including Susan Collins of Maine see little need for a big new spending bill after last month’s dose, Biden’s making the case that the crisis is deepening, not fading, and urgent action is needed. But top Biden aides acknowledge that unilateral action can only accomplish so much.
“If we don’t act now, we will be in a much worse place, and we will find ourselves needing to do much more to dig out of a much deeper hole,” Biden’s top economic adviser, Brian Deese, said of the stimulus plan at a press briefing on Friday.
Record Covid-19 death tolls and renewed lockdowns have battered the economy this winter. A government report for December on Friday is expected to show the worst back-to-back monthly declines in personal spending since the dark days of last spring. And while U.S. stocks hit record highs the past week, some of that optimism has been based on assumptions of new stimulus getting passed.
Biden’s executive actions can at least signal his intentions, but he’ll need cooperation from Congress to validate financial markets’ confidence and make a real difference for the economy and the 11 million unemployed Americans. The legislature’s sign-off is required for the scale of spending needed to notably boost growth.
Biden signed two orders on Friday that expand food stamp benefits for low-income families, direct the Treasury Department to ensure Americans eligible for stimulus checks received them and reinstate protections and collective bargaining rights for federal workers. Next week, he’s expected to sign additional actions urging federal agencies to buy goods and services from U.S. companies, directing regulatory action to fight climate change and strengthening Medicaid.
“It is perfectly reasonable and necessary to start with a strong statement of intent from the administration, and it sounds like that is how they will use the executive orders — as ammunition in the battles to come,” said Thea Lee, president of the Economic Policy Institute, a left-leaning thinktank.
“But when we talk about the $1.9 trillion Covid relief package or the big investments in infrastructure, climate change or the ‘care economy,’ those are things that will need the finance and power of the U.S. Congress to succeed,” she said.
Biden’s plan has so far sparked little enthusiasm from congressional Republicans. They have complained his first legislative proposal is too expensive, not targeted enough or is too much of a laundry list of liberal goals, including a minimum wage increase.
Not a single Republican has indicated support for Biden’s stimulus plan as presented, with Senators Mitt Romney, Chuck Grassley and Collins questioning the urgency since the government is still enacting a $900 billion stimulus from December.
“It’s hard for me to see, when we just passed $900 billion of assistance, why we would have a package that big,” Collins said this week about Biden’s proposal. “I’m not seeing it right now, but again, I’m happy to listen.”
Parts of the plan could get traction, however. Republican Senator Todd Young of Indiana called the total package a “non-starter, but it’s something that we will scrutinize and hopefully, find some common ground on.”
He said he might support a proposal to add funding for coronavirus vaccinations, as an example, and said he and Vice President Kamala Harris had spoken about finding a compromise.
The Biden team has said it would prefer to pass the relief package with Republican votes. Deese is scheduled to speak with a bipartisan group of senators on Sunday at 3 p.m. Biden is making his own calls to lawmakers, though the White House has declined to specify with whom he’s speaking.
During her confirmation hearing on Tuesday, Treasury Secretary-designate Janet Yellen defended Biden’s proposal against Republicans who raised concerns about the deficit — an issue that practically evaporated in Washington while Donald Trump was president.
She said Congress needs to “act big” to revive the economy.
“Right now, short term, I feel that we can afford what it takes to get the economy back on its feet, to get us through the pandemic,” Yellen told the Senate Finance Committee, highlighting that interest rates are historically low and that debt-servicing payments as a share of the economy are lower today than before the 2008 financial crisis.
She said doing too little to sustain the economy now could lead to “scarring.”
Presidents Barack Obama and Trump both made liberal use of executive orders and other actions to make policy, particularly when the opposing party controlled a chamber of Congress.
“Executive orders are the trend. It began almost 30 years ago, and they are becoming more and more the practice because Congress has been unable and unwilling to address these challenges through statute,” said former Democratic Senate Majority Leader Tom Daschle.
Daschle said Biden has no choice but to use the executive-authority tools: “He has an ambitious agenda.”
©2021 Bloomberg L.P.
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