The Great Lockdown Economy
The International Monetary Fund (IMF) has labeled the pandemic-induced global recession as “The Great Lockdown” and predicted that it would be the worst downturn since the Great Depression, much deeper than the 2008-09 financial crisis. “This is a crisis like no other, and there is substantial uncertainty about its impact on people’s lives and livelihoods…this is a truly global crisis as no country is spared.”
The IMF anticipates that the global economy will drop by 3 percent in 2020 and the U.S. economy is expected to shrink by 5.9 percent. The good news is that there should be a swift rebound in 2021, presuming the pandemic fades in the second half of the year and that “government policy actions are effective in preventing widespread firm bankruptcies, extended job losses, and system-wide financial strains.” The bad news is if those actions do not occur, 2021 output could be worse than that of 2020.
Who needs predictions when you have real time data that show rapidly deteriorating conditions?
March Retail Sales plunged 8.7 percent from February, the largest monthly decline since the government started tracking these stats in 1992. Sales cratered month over month at: Food services/drinking establishments (-26.5%); Auto Dealers (-27%); Furniture Stores (-27%); Department Stores (-20%); and most strikingly, Clothing and Accessories (-50.5%).
The sudden and precipitous drop has prompted some big retailers to consider emergency measures. J.C. Penney and Neiman Marcus are both exploring bankruptcy protection to refinance looming debt payments and Macy’s, the largest U.S. department store by sales is considering new financing. The bright spots were Grocery Stores (+27%); General Merchandise (+6.4%); and Building Materials and Garden Supplies (+1.6%).
The retail numbers don’t include much of the service economy, where the damage may be more pronounced. In just six weeks, the financial fallout from C-19 has been unprecedented in terms of both its speed and its severity.
Another 5.25 million Americans filed for unemployment benefits in the week ending April 11th, putting the four-month tally at a staggering 22 million. That means that one out of every eight workers has been sidelined in just four weeks. Additionally, the Labor Department keeps track of the number of people already receiving unemployment benefits, which usually lags the weekly number. These “continuing claims” now stand at 12 million, twice the prior record of 6.6 million set in 2009 at the end of the financial crisis. The number of continuing claims lags behind the initial-claims data and is expected to continue to grow.
Economists say that over the next four to six weeks, the worst may pass. But they caution that there could be a second wave of job losses, ensnaring everything from small law firms, to state and government workers, to non-essential health care workers. The big question is how quickly these workers are able to secure re-employment. The answer may lie in the ability of the nation to test for and track the virus.
Looking ahead, the strength of the next expansion “will depend upon business and consumer behavior, government finances and a global recovery. There are lots of variables, but not a lot of certainty,” says economist Joel Naroff. Unfortunately, as the period of uncertainty persists, we will see evidence of dramatic weakness. Last week the Federal Reserve’s Beige Book of 12 regional banks showed that activity has plunged across the country and manufacturing production in March suffered its biggest monthly drop since 1946.
Government Lifeline Update
Treasury said 80 million Economic Impact Payments went out last week and in an effort to help those who want money faster, they launched a new FREE app called “Get My Payment”, on what would have been Tax Day. The tool allows taxpayers who filed their tax return in 2018 or 2019 but did not provide their banking information on either return to submit direct deposit information. Once they do, they will get their payments deposited directly in their bank accounts, instead of waiting for a check to arrive in the mail.
It took less than two weeks for the Small Business Administration’s $350 billion Payroll Protection Program (PPP) to run out of money. I spoke to someone in the Administration, who acknowledged that there have been real problems with PPP. Specifically, there was a disconnect between the banks and the government, with banks needing assurances that they were properly managing the process and complying with existing regulations and the government wanting the program to move as quickly as possible. Regardless of why the program was gummed up, there are still millions of small businesses that need the cash to survive. Negotiations in D.C. continue for an additional $250 billion for the program.
One thing is clear: the government financial lifelines are meant to fill the economic hole created by the virus. Former Federal Reserve Chair Ben Bernanke recently told a group of investment advisors that opening up the economy will not ease people’s concerns. As a result, the recovery could be one highlighted by fits and starts. How the economy emerges once this period passes is really anyone’s guess.
The Great Lockdown will forever change some people and industries, but don’t tell that to investors, who are counting on flattening curves, treatments and government actions that will provide assistance. As Joel Naroff notes, “Those private sector-government paid workers eventually have to actually work and businesses will have to make enough money to pay them. Over 30 million is a large number to find real work when the reopening is going to be phased in. But hey, the relationship of Wall Street to Main has been tenuous for a long time so I guess we can chalk this up to, well I have no idea what.”
If you need help navigating the financial part of this national emergency, download the Jill on Money daily podcast, where I am providing updates on the situation. As always, you can send e-mails to me at here.