Thursday, April 23, 2020

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And why the rebound is still a long way off

In a few hours, we’ll get the latest reading on initial jobless claims.

For the fifth straight week, the numbers will mind-boggling. Expectations are another 4.5 million Americans filed first-time claims for unemployment insurance, according to data from Bloomberg.

This data indicates that over the last five weeks in excess of 25 million Americans have found themselves out of work. The consequences of this kind of economic hard stop are only beginning to be understood and felt.

But one economist thinks the state of the economy isn’t likely to grow increasingly grim in the weeks ahead.

“The economy itself has probably bottomed,” said Neil Dutta at Renaissance Macro in an email on Wednesday.

“Let me be clear: that DOES NOT mean a return to robust activity, but it does mean that economic conditions are not getting any worse at the moment,” Dutta adds.

“We’ve seen an uptick in weekly steel production, TSA travel numbers have stabilized, mortgage purchase applications have ticked up, and motor gasoline demand has ticked up, a sign vehicle miles driven are up.”

Now, of course, given the magnitude of the fall-offs we’ve seen in the labor market, in restaurant reservations, consumer spending, and consumer confidence it’d be difficult for the data to get worse indefinitely.

And given the backward looking nature of economic data, reports due out in early May that will more fully reflect the economic halt in April — readings like retail sales, the jobs report, and services and manufacturing PMIs — will be shocking. The record decline in GDP economists have been forecasting for a month now won’t be seen until late July when the first reading on second quarter GDP is published.

There is, no doubt, plenty of bad data to come. But the real-time experience of an economy shutting down and the immediate labor, demand, and supply shocks seen during April are likely to be the worst of this downturn.

The road ahead, however, is going to be hard, with Dutta writing that “the fragile process of re-opening the economy...is going to be bumpy for both the economy and stocks.”

And while the drumbeat of “re-opening” the economy continues to grow louder, healing the U.S. economy is far from a completed task. “With long-term interest rates still very low, there is no constraint for Uncle Sam to do more,” Dutta writes.

“Now is not the time to worry about the debt, nor is it the time to ask how things will be paid for. Plugging the revenue shortfall for state and local should be an important priority; our rough estimate is that $300 billion is needed for aid to the states.”