When JPMorganChase reported earnings in mid-July, CEO Jamie Dimon quipped: “This is not a normal recession… the recessionary part of this you’re going to see down the road.” This observation is spot on. Dimon was observing that, while government had shut down much of the “nonessential” (i.e., 80%) economy, they also transferred $2.1 trillion to private households which more than made up for the $720+ billion of lost wages. We have seen many reports of those on state unemployment insurance programs receiving more money than they were earning in their jobs. In fact, personal income in the year’s first half is actually up +6% (+12% annual rate). [Then there is the observed increase in day trading in the equity markets by former sports gamers, purportedly using such transfer payments.]
There has also been forbearance regarding rent payments, mortgage payments, credit card payments, student loan payments… So, it isn’t any wonder why, while small businesses are closing at Armageddon rates and large business bankruptcies are skyrocketing, the real recessionary pain has yet to be felt. Mr. Dimon was referring to the time when the helicopter money is no longer forthcoming, when production levels reflect all of the business failures, and when the unemployed aren’t receiving more income than they had been earning in their now defunct jobs. That time doesn’t appear to be imminent, as Congress is in the process of conjuring up another “stimulus” package, which is likely to push the recessionary impacts to at least after the November elections. That appears to be the point “down the road” where the “recessionary part of this” comes to bear.
Is This Really “Stimulus”
I put the word “stimulus” in quotes because, while Congress and the media refer to their money drops with that name, it really isn’t “stimulus” at all. “Stimulus” is defined as something that encourages, or boosts, incremental activity, i.e., an incentive. But, what we have seen so far is simply transfer payments that don’t encourage or boost economic activity, but simply try to replace and maintain incomes. In fact, there is a great deal of “disincentive” for those receiving more in unemployment insurance payments than they earned in their employment to actually return to those jobs, a complaint of many businesses as documented in the latest Fed Beige Book.
The initial business shutdowns put the economy into a deep recessionary hole. May and June began the recovery, but the reinstitution of restrictions/business closures in late June and July are sure to make the future “recessionary part” of this experience that much worse.
- Existing Home Sales: Don’t be fooled by the M/M percentage change (20.7%) for this indicator. When the denominator is low, especially after a huge fall, the percentage changes can be misleading. Existing Home Sales have only recouped 40% of their fall. On the other hand, because of the newly found desire to live in a low density area in a house with a backyard, and because mortgage rates are now at historical lows (less than 3%), New Home Sales rose 13.8% (mainly single family). And, as a result of the pandemic, fewer homes have been for sale, and inventory is very tight. Those suburban homes with back yards are selling for top dollar.
- Retail: The rate of closure of small retail stores is running at triple the rate of 2019. This sector employed 16 million people, pre-pandemic, more than all of manufacturing and two times more than construction or finance. Only 69% of retailers paid their July rent; was 88% in March. Yelp says 73,000 businesses have already closed. The Society for Human Resource Management says 52% of small businesses expect to close in the next six months.
- The NY Fed’s weekly economic index, a measure of higher frequency data, shows a bounce back in June of about 35% from the April lows. But the latest couple of weeks (mid-July) show deterioration with weekly data showing scores of -7.08 (July 18) and -6.99 (July 11).
- Other high frequency data show similar deterioration. For example, Open Table shows both a M/M and W/W contraction in restaurant reservations while credit card companies are showing lower card usage throughout July.
- Consumer Sentiment (University of Michigan) was pummeled by the rise in case counts, falling from 78.1 in June to 73.2 in July. April’s low was 71.8. For context, it was 101.0 in February, so this indicator remains near its bottom. The sub-indexes say that 20% of the population have a high degree of job uncertainty, and intend to save more. Higher savings rates mean lower consumption and much slower rates of economic growth, as proven by the aftermaths of both the 1918 pandemic and the Great Depression.
No doubt April was the low point of the Recession/Depression, as business re-openings began in May. And the data showed some bounce. This wasn’t unexpected, as the economy, nearly completely shuttered, began to re-open. But, with case counts having risen and are now front and center of the daily media, the politicians are now either reversing or pausing the re-openings. And those businesses that are open often have capacity restraints.
Ultimately, employment is the key to the health of the economy. In past blogs, I noted that the downward slope in the weekly Initial Unemployment Claims (IC) was flattening. In the latest data for the week ended July 18, the Department of Labor reported that IC actually rose to 1.416 million, up from 1.307 million (week of July 11), which, itself, was essentially flat to the 1.310 million of the prior week (July 4).
The Department of Labor continues to report the seasonally adjusted (SA) data as the headliner. SA is supposed to take into account things that occur because of the calendar, like retail sales in November/December, or summer travel, etc. But the closing of the economy defies seasonality, i.e., we don’t expect economic shutdowns to repeat themselves every March, and even if we did, we don’t have historical data showing such shutdowns with which to prepare the seasonal factors. Thus, the application of seasonal factors biases the results.
The Not Seasonally Adjusted data (the raw data) paints a similar, but more accurate picture of the employment scene. IC for the last four weeks are as follows: 6/27: 1.42 million; 7/4: 1.40 million; 7/11: 1.52 million; 7/18: 1.37 million. So, slightly different from the seasonally adjusted data discussed above in that the uptick in the IC data appeared the week of 7/11 in the raw data, as opposed to the latest week (7/18) in the SA data. Normally, not a big deal – but, today, when markets hang on every second derivative, a possible biggie.
The chart shows total claims including Continuing Claims. The data are not SA (NSA). Note that the downslope in the state unemployment claims system is essentially gone. The sum of the four weeks ending July 11 showed a net increase in employment of +1.38 million. That was a significant slowdown from the prior four weeks (+2.72 million). This is confirmation of the slowdown in the recovery, if not regression, noted in the data presented above.
When the Pandemic Unemployment Assistance (PUA) program data are added in, as shown in the next chart, it appears that the employment deterioration began in June, and then began to turn around in early July. The PUA data are less reliable in that state reporting is spotty. Some states don’t report on a consistent basis and the detail differs state to state. But, what is striking about this exhibit is that it shows a truer picture of the magnitude of the unemployment issue (nearly 33 million) and provides a reference point as to Jamie Dimon’s comment that the real impact will be felt “down the road,” i.e., when a significant portion of these 33 million can’t find work in an entirely re-opened economy.
The table and chart show the weekly BK filings of publicly traded companies via the Bloomberg database. As indicated in the picture at the top of this blog (Sur La Table), there have been bankruptcies of well-known companies (including JC Penney, Neiman Marcus, Hertz, Lucky Brand, 24 Hour Fitness, Borden, Pier 1 Imports…). There are more to come, many more. The uptrend from 2018 and 2019 filings is obvious in the chart. Notable is the acceleration of this trend since April 30. Once again, as these accelerate, the bulk of the damage will be felt “down the road.”
In past blogs, I have noted the extraordinary level of Fed intervention beginning in March, much, much more than in the Great Recession. This includes its balance sheet expansion ($3 trillion since March) and the expansion of the monetary aggregates (20%), as well as the Fed’s new excursions into bond-land (the purchase of bonds of specific companies, including junk bonds), and into direct loans and guarantees for specific companies.
As we move “down the road,” the Fed’s interventions are going to increase, not decrease, as one would normally expect as a recovery develops. This is because, as Mr. Dimon presciently noted, the recession’s impacts have been delayed (i.e., “down the road”). So, it wouldn’t surprise me to see the paper of shopping malls, office buildings, and perhaps even specific municipal assets (like transit systems) appear as assets on the Fed’s balance sheet. Moral hazard at an extreme!
Interest Rates? Not just lower for longer – but much lower for much longer!