ECONOMIC UPDATE

  • With much of the global economy on lockdown, unemployment has surged and output has slowed dramatically
  • Some states are beginning to re-open parts of the economy, but a recent ABC News/Ipsos poll suggests consumers remain hesitant to resume certain activities
  • Economists continue to debate the alphabet soup of recovery trajectories

Much of the global economy remained on lockdown throughout the month of April, there is still no consensus on what the ultimate recovery will look like. In the U.S., more than 30 million people have filed for unemployment insurance, and the headline unemployment rate could eventually exceed 20%. This is the most severe collapse of the U.S. labor market since the Great Depression, although the initial government response is very different this time around. The Federal Reserve’s commitment to essentially unlimited monetary support has brought calm to most corners of the fixed income universe, particularly investment-grade sectors. On the fiscal front, Congress has approved nearly $3 trillion of aid for individuals and businesses so far, which, as characterized in last month’s commentary, is a band-aid as opposed to stimulus for a $20 trillion economy on lockdown.

The economic data received in recent weeks has been, in many ways, unprecedented and surreal.  The advance estimate of Q1 GDP was worse than expected at -4.8% QoQ (annualized), drug down by a 7.6% decline in personal consumption. The second quarter is expected to be much worse, with the current Bloomberg economist survey forecasting a 28% decline in GDP. For added perspective, the post-World War II record is -10% in 1958. For added perspective, Exhibit 1 provides a snapshot of just how severe and sudden the economic fallout has been. The New York Fed Weekly Economic Index (WEI) looks at metrics such as initial unemployment claims, same-store retail sales, steel production, fuel sales, and electricity consumption, and the index represents the year-over-year change in these weekly measures. As illustrated, the WEI falls off a cliff in March and is now effectively three times worse than the lows in 2009.  Yes, this was self-inflicted in order to slow the spread of a devastating virus, but the damage has still been done. The massive amounts of fiscal and monetary aid help, but it’s not as if you can flip the U.S. economy back on like a light switch

Recovery Alphabet Soup
The ultimate economic recovery will depend, in large part, on the effort to contain COVID-19 and restore confidence that people can resume more “normal” behavior and consumption habits. In other words, how soon before people are willing to eat at a crowded restaurant or get back to regular air travel for business or personal reasons? Exhibit 2 provides a summary of a recent ABC News/Ipsos poll asking respondents how likely they would engage in certain activities when social distancing guidelines are eased.  It appears that people are clearly ready to go back to work, and many people are growing tired of their current hairstyle (or lack thereof). There was less than a 50% likelihood they would want to eat at a restaurant, and less than 30% likelihood of getting on an airplane…

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