Well we knew the monthly employment report would be bad. And Friday’s report certainly was. U.S. unemployment surged to 14.7% (chart below), its highest level since the second world war, after 20.5m people lost their jobs in April. The fall in non-farm payrolls in April was the largest drop on record.
Job losses were widespread. Key industries hit hard were:
- Food services -5.5mn
- Retail -2.1mn
- Healthcare providers -2.1mn (this is a bit surprising)
- State and local governments -1mn
- Temporary help -0.8mn
- Hotel/accommodation -0.8mn.
- Federal payrolls edged up 1k, boosted by ~4k of Census hires.
Just at depressing, the job losses that have taken place since this crisis began have reversed all the job gains since the 08/09 financial crisis, as you can see below.
So far, the majority of the job losses have been temporary. But the key question going forward is how many of these turn into permanent losses if businesses start to close.
The Disconnect Between the Economy and the Markets
The jobs numbers are dismal, but the short-term outlook for incomes isn’t all bad. Goldman put together an analysis this week that models labor income over the next couple years based upon layoff trends, transfer payments, etc. The basic thrust of the analysis is that incomes will actually be up in Q2 due to transfer payments. Q3 looks to be flat relatively vs. the fourth quarter last year.
Obviously, once unemployment benefits expire incomes then take a hit in Q4 and beyond. And this gets to the policy response and the seeming disconnect between the real economy and the markets, as captured in The Economist’s front cover this week.
It almost goes without saying that the fiscal response to the pandemic has been much larger and faster than it was after the financial crisis. But it’s not just a bit larger – it’s massively larger, as you can see below.
The same is true for monetary policy. As BCA noted this week:
“Monetary policy is the main reason behind the resilience of the equity market. The BCA Monetary Indicator shows that monetary conditions are at their most accommodative setting on record, even more so than after 2008 when the Fed deployed its first QE program. As a result, ample liquidity is promoting risk-taking and making its way into the stock market. The process is lifting equity multiples and thus, stock prices. Moreover, US stocks are the ones receiving the greatest benefit from easy monetary policy because the Fed is the most aggressive of the global central banks. The policy is set to remain accommodative for more than two years. As we previously highlighted, the IMF expects a global loss of output of $9 trillion over the coming two years. The resulting abysmal output gap will pin realized inflation to the floor for that time frame and will allow global central banks to provide liquidity to the market.”
A Trillion Here and a Trillion there…..
On the policy front there is almost certainly more support to come. Greg Valliere summarized the outlook for another fiscal package from Congress this summer:
“There’s a description in Washington for a bill that’s filled with goodies — a Christmas tree. There’s a rich tradition of taking a must-pass measure and loading it up with something for everyone, and that’s what appears to be happening now on the next (and possibly final) virus aid bill.
Not all of the Christmas tree provisions will prevail, they simply cost too much money. Here’s our best guess on some possible compromises:
– State and local government aid: Several hundred billion dollars is the likely price tag, but not a penny for pension funds. Small cities and counties will be included this time.
– Another check for most everyone: $2,000 checks are out of the question, but there could be smaller checks for people who are hard-hit.
– More unemployment relief: Possible but less than in the previous bill; Republicans will fight hard against another big payout.
– Small business aid: possibly one last tranche, maybe for a couple hundred billion dollars, with strict eligibility rules. No prep schools allowed.
– A payroll tax cut: Trump prefers abolition, which is out of the question, but a small cut has an outside chance.
– Tort reform: A deal is possible, but a blanket exemption from lawsuits is unlikely. Lots of money is at stake for lawyers on both sides of this issue, which is why a compromise is possible.
– Aid for hospitals, first responders, more testing, etc.: Very likely, only issue is how much of a hike, not whether.
– More money for food stamps, nutrition, etc.: Pelosi will get something, not as much as she wants.
– Infrastructure spending: Mitch McConnell and most Republicans are cool to the idea, but something modest is possible, perhaps in a separate bill.
BOTTOM LINE: Everyone has made their first demands, next will come first offers. The key will be Trump, who wants one more shot of stimulus before the election. He will have to battle with reluctant Republicans, but a $1 trillion-plus bill still looks likely after several weeks of bickering and horse-trading.”
If true, this would bring total additional government spending since this crisis began to over $4tn, or more than 20% of GDP.
This comes close to what the U.S. spent on WWII in today’s dollars!!
Some Charts We Are Watching
1) There has been an unprecedented use of the word unprecedented to describe today’s environment. I’m deeply guilty of this.
2) More states are lifting restrictions, even as some fall short of the White House reopening criteria.
3) If you look at OpenTable booking data, Texas is showing an uptick as things reopen.
4) But infection rates in Texas continue to grow.
5) The State of California has a new site up that tracks infections rates, deaths, etc. https://update.covid19.ca.gov/#top. The regional breakdown is interesting
6) Sweden is proving to be an interesting case study.
7) China isn’t back to normal, but it is moving towards 70% to 80% of normal.
8) If there’s no more handshakes, what will take its place? I’d vote for the Thai Wai.
Have a good weekend.
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