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This is what the Founding Fathers were referring to when they called America “13 laboratories”. Except now it’s “50 laboratories”. As the country starts to open back up, (more than 30 states appear to be easing restrictions and others will likely soon do so), we will get to see what works. And this will happen faster (but not fast enough) because of so many different approaches being tried. Have faith in the private sector’s ability to figure out what will work best quickly. One thing is for sure: there will be good ideas and bad ideas. The good ideas will win out (unless the government mandates the opposite).
Most states are opening slowly and cautiously. This will result in an economic recovery that is slow and tentative. The shape of the recovery at the present time is unknowable. There are too many factors that are uncertain. But, the game has started. I think it will be a lot of bumps and dips along the way. Time will tell.
This will not be easy for most industries. There are supply chain constraints. Many small businesses will not reopen. People may have changed their habits in ways that hurt certain types of businesses (getting on a plane for Europe or going to a crowded resort at any time soon?). People are likely to save more and spend less than pre-COVID-19. There are lots of factors that will come into play. This goes for those who remained employed during the crisis as well as those who were compensated through the CARES Act. The good news is that most, but not all, Americans will be active participants in the recovery as it occurs. While the CARES Act is far from perfect, I hate to think of what things would look like without it. While there will be issues related to the cost of the Act, those issues are not immediate.
For too many, the government either got there too late or the design of the CARES Act didn’t provide the expected safety net. For example, there are about 32-33 million businesses in the U.S. The great majority (like all but 20,000) employ less than 500 people. In fact, 76% have no employees. These are sole proprietorships, independent contractors, consultants and those who freelance for larger companies (like most real estate agents). In addition, of the 7.8 million businesses in the U.S. that have employees, 4.3 million have 4 employees or less. This is where the Act falls down. It is designed for those companies with employees and where those employees make up the largest portion of the cost. Yet, the implementation (a very difficult task at best) has been slower than most would have liked. For many businesses, but especially small businesses, revenues have gone to about $0. But, rent, utilities, and other non-employee costs continue. Since the Act limits how much of the money paid out can go for non-employee costs, those companies with few or no employees are less likely to survive. My guess is that when the dust settles, 20%-30% of pre-COVID-19 businesses will not reopen.
There are other issues that will continue until a vaccine or drugs to mitigate the Coronavirus materialize. Can a restaurant survive at the low level of capacity that social distancing mandates? The answer is problematic unless you have one heck of a take-out business. How about retail stores? How about the unintended consequences of those laid off due to COVID-19? Many will likely receive more from unemployment than they would get by working. I know of a case where a hotel owner wants to reopen six hotels but can’t find enough employees that will come back to work because it would mean a pay cut for them.
The bottom line is that we are at the very beginning of a long haul. Don’t expect miracles. But, the economy will recover. It will not recover in a straight line. It will not be very rapidly and not without setbacks. But, at least the game has restarted.
As for last week’s data, more is relevant to the post-COVID-19 world. While initial claims for unemployment insurance declined somewhat, it was still very high. The layoff number is now at least 30 million and climbing. Real GDP in the first quarter fell at a surprisingly large rate when you consider that 10 or 11 of the 13 weeks in the quarter were pre-shutdown. Consumer confidence in April fell significantly. The April ISM manufacturing data shows a manufacturing recession. And pending home sales fell in March.
- Initial claims for unemployment insurance were 3,839,000 for the week of April 25. While this is down 603,000 from the week of April 18, it is still 1,569% (that’s right-16 times) above a year ago. This brings the total initial claims in the six weeks since the Coronavirus pandemic started to over 30 million. There is no end in sight. At this point, 12.4% of the U.S. workforce is covered by unemployment insurance. Once all the claims are approved, the number will be considerably higher.
- Real GDP for the 1st quarter of 2020 fell by 4.8% at an annual rate. This occurred even though more than the thirteen weeks in the quarter were before the stay at home and business closure mandates were issued. This suggests that the 2nd quarter will be far worse. The weakness was widespread across segments. Consumer spending, business investment, exports and inventories contributed to the decline while residential investment, government spending and imports were partial offsets. Real disposable income growth fell from 1.6% to 0.5%. The savings rate rose to 9.6% from 7.6%. The recession we are now in began in March. It will be severe and is entirely a result of the necessary attempt by the government to control the Coronavirus pandemic.
- The major takeaway from the Federal Open Market Committee’s post-meeting statement is that policymakers believe COVID-19 now poses a significant risk to the economic outlook over the medium term. This is different from the March statement that focused on the near term implications. The Fed anticipates keeping rock-bottom rates until the economy weathers COVID-19. This goal is a bit fuzzy other than it suggests that the Fed will do everything it can to support the economy.
- The Conference Board consumer confidence index fell sharply from 118.8 in March to 86.9 in April. In April 2019, the index stood at 129.2. The present conditions index fell from 166.7 in March to 76.4 in April. This is the largest drop on record. The Expectations index actually rose from 86.8 in March to 93.8 in April.
- The ISM’s manufacturing index fell to 41.5 in April from 49.1 in March. A year ago, the index stood at 53.4. Any reading below 50 suggests that the manufacturing sector is in a recession.
- The NAR pending home sales index fell in March to 88.2 from 111.4 in February and 105.4 a year ago. The reading was taken after the coronavirus induced shutdown began.
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