As we covered here on The Capitalist last week, during an interview with Bloomberg News, Federal Reserve Bank of St. Louis President James Bullard said that he is forecasting the U.S. unemployment rate will hit 30% in the coming months as the coronavirus pandemic continues.
The comments understandably raised a few eyebrows at the thought of such a staggering unemployment rate, which would be nearly triple what we experienced during the Great Recession.
Bullard tried to soften the blow in a later interview with CNBC, stating that although the unemployment number will be “unparalleled” we shouldn’t get discouraged.
“…if we play our cards right and keep everything intact, then everyone will go back to work and everything will be fine.”
Now, one of Bullard’s colleagues at the St. Louis Fed has an even more dour prediction about what America will face in the coming months.
In a research paper published last week, Miguel Faria-e-Castro, an economist at the St. Louis Fed, titled his article “Back-of-the-Envelope Estimates of Next Quarter’s Unemployment Rate” and estimated (remember, this is one man’s estimates) that nearly 53 million Americans could find themselves unemployed due to the coronavirus.
That works out to an unemployment rate of 32.1%. At the peak of the Great Depression nearly 100 years ago the unemployment rate topped out at 24.9%.
Faria-e-Castro acknowledges that it’s a massive number, and states “These are very large numbers by historical standards, but this is a rather unique shock that is unlike any other experienced by the U.S. economy in the last 100 years.”
He points to previous research that identifies 66.8 million workers who are in “occupations with high risk of layoff” that include sales, production, food preparation and services. He then looks at additional research that found 27.3 million workers in “high contact-intensive” jobs at risk such as barbers, stylists, airline attendants and food and beverage services.
Faria-e-Castro then averages those two numbers and adds in the existing number of unemployed Americans to arrive at his estimate.
While we are nowhere near reaching that unimaginable number, we are at the very beginning of a massive wave of initial jobless claims filings.
Just last week initial jobless claims hit a record of 3.3 million and another 2.65 million are expected to join them this week, according to economists surveyed by Dow Jones.
Some are even more pessimistic.
Thomas Costerg at Pictet Wealth Management has the highest estimate at 6.5 million, while Goldman Sachs estimates 5.25 million and Citigroup is at 4 million.
Moody’s Analytics predicts that initial unemployment claims from last week, which will be announced Thursday, could reach 4.5 million.
“COVID-19 has caused unemployment to surge and we look for U.S. initial claims for unemployment insurance benefits this week to total 4.5 million, compared with the 3.283 million in the week ended March 21,” Moody’s Chief Economist Mark Zandi said in a statement.
We Just Set A Record For The Greatest 50-Day Rally In Stocks
The S&P 500 just turned in its best 50-trading day rally since the index expanded to 500 companies in 1957, according to research from LPL Financial.
Over that time period, the index has returned 37.7%. If history is any indication, there are plenty more gains ahead.
LPL went back and looked at every 50-day rally since 1957 when the index expanded. Their research found that six and 12 months later, stocks were higher 100% of the time.
The average return for the six months following a 50-day rally was 10.2%. On the other hand, the average return for the 12 months following a 50-day rally was 17.3%.
After the longest bull market in history ended this year when the S&P 500 dipped all the way down to 2,191.86 on March 23, the market has been on a rocket ship higher. In just 50 trading days, the index has climbed 41.7% from the March 23 low. This puts it only 9% below the all-time high set in February.
Markets have been pushed higher by a combination of record stimulus packages and low-interest rates. In March, President Trump signed the $2 trillion CARES Act that provided financial aid to families and small businesses. Around the same time, the Federal Reserve cut interest rates to zero. Also, more recently it started directly purchasing Treasury bonds, mortgage-backed securities and even bond ETFs as it pledges an unlimited amount of asset purchases.
Uneven Recoveries Despite A Rally
While the stock market has surged higher over the last 50 trading days, recovery has been uneven, to say the least. This comes with some stocks – and entire industries – getting hammered by the economic lockdown caused by the coronavirus. Meanwhile, others, particularly those that benefit from people being home all day – and working from home – have lead the charge.
Amazon, Facebook and Netflix have all surged to all-time highs. Meanwhile, the video conferencing platform Zoom has jumped 228% this year alone.
On the other side are stocks like cruise line operator Carnival Corporation or American Airlines. Both have fallen 66% as the travel industry came to a standstill.
Despite the appearance of strength by the stock market, even the greatest 50-day rally in history can’t shake the doubters loose.
Since the rally began back in late March, the country has had more than 40 million people file for unemployment. Our country’s economic output is expected to drop by as much as 50% this quarter, and numerous CEOs refused to provide forward guidance for their companies as they just simply don’t know how bad and for how long the economy will suffer.
Throw in ongoing civil unrest and a very strong likelihood of a full-blown trade war between the US and China, and it remains to be seen if the economic recovery can continue to blossom in the coming weeks and months.
Nobel-Prize Winning Economist: Time to Admit Our Programs Have Failed
Senate Republicans have endorsed a bipartisan bill that would give small business owners more flexibility on how they choose to spend their PPP loans. However, at least one outspoken critic has said the program failed American workers.
Senate Majority Leader Mitch McConnell and Senator Marco Rubio, who chairs the Small Business Committee, both endorsed the Paycheck Protection Program Flexibility Act. This almost passed last week, in a nearly unanimous 417-1 vote.
“I hope and anticipate the Senate will soon take up and pass legislation that just passed the House by an overwhelming vote of 417-1 to further strengthen the Paycheck Protection Program so it continues working for small businesses that need our help,” McConnell said during a speech on the Senate floor Monday.
The Paycheck Protection Program provides forgivable loans of up to $10 million to businesses. The money is for businesses with fewer than 500 workers that were affected by the coronavirus pandemic.
Originally, for the loans to be forgiven, the businesses had to abide by strict requirements. They need to let loaners know how the money could be used. Around 75% of the loan had to go towards maintaining the businesses’ payroll. This includes salaries, health insurance, leave and severance pay, as well as having to rehire workers by June 30.
Easing Up Restrictions of Programs
The bill endorsed by McConnell and Rubio that passed on Thursday would ease some of those restrictions. This includes allowing businesses to spend 60% of the money on payroll. It also includes freeing up 40% of other expenses like rent and utilities. The new bill would also remove the requirement of rehiring workers by June 30. Also, it gives businesses 24 weeks to spend their PPP money on. This is far longer than the current 8-week limit.
The new bill isn’t perfect. However, they created programs such as this in an effort to address concerns by small business owners. Many of these business owners think the loan forgiveness requirements can become too strict to meet their needs. Many are fearful of inadvertently violating the rules and being on the hook to repay the loans.
Nobel Prize-winning economist Joseph Stiglitz says that no matter how they structure PPP loans, they have failed the American worker.
During an appearance on CNBC, Stiglitz said “The problem wasn’t just the amount of money. It was how the programs were designed. Our programs have failed, and we have to admit that.”
He says the loans went to the businesses who were most connected, not the ones who were most in need.
“The businesses with the best connections with the banks, the best customers, got at the head of the line, and those weren’t the smallest businesses, they weren’t the people who needed it most,” he said.
He said a better way to keep workers employed is looking at a model from Denmark or New Zealand. In the said countries, the government paid companies directly to keep workers on their payroll.
Stiglitz added, “We just haven’t thought enough about how we get money to the businesses in ways that make sure they really keep the attachment to the workers with those businesses.”
Fed Economist: V-Shaped Recovery Requires Negative Interest Rates
Despite repeated statements from Federal Reserve Chairman Jerome Powell that the central bank would not consider negative interest rates in an effort to help our economy recover, at least one economist from the St. Louis Fed says that’s exactly what the country needs if we want a “v-shaped” recovery.
A paper was published Friday on the St. Louis Fed’s website. In it, Yi Wen, Assistant Vice President and Economist, argues that a “v-shaped” recovery is not only possible but necessary. The key to this is using “aggressive monetary policy” beyond what was used, Wen believes. He said we need to dig the country out of the financial crisis. This includes negative interest rates.
In his paper, Wen compared the government’s response to two major economic downturns: the Great Depression and the financial crisis.
He found that during the Great Depression, President Roosevelt’s aggressive fiscal response with the New Deal led to a v-shaped recovery. Meanwhile, the financial crisis saw an L-shaped recovery when the Fed only used monetary responses. These include the likes of low-interest rates and asset purchases.
“I found that a combination of aggressive fiscal and monetary policies is necessary for the U.S. to achieve a V-shaped recovery in the level of real GDP,” Wen wrote. “Aggressive policy means that the U.S. will need to consider negative interest rates and aggressive government spending, such as spending on infrastructure.”
The combination of monetary and fiscal response should create an “s-shaped” recovery, according to Wen. There, growth starts slowly and then quickly bursts higher.
“Importantly, these policies also need to continue even when the crisis is about to end to provide a further boost,” he wrote. This leads “to a more robust recovery,” he also mentioned. “Furthermore, it’s the combination and coordination of both monetary and fiscal policies that provides enough stimulus for a V-shaped recovery. In other words, aggressive monetary policy — such as negative interest rates — may be ineffective on its own without aggressive fiscal stimulus.”
He warns that without both a monetary and fiscal response, “the economic consequences of the coronavirus pandemic will be permanent.”
But Chairman Powell seem to disagree. He and many of his colleagues have openly dismissed the idea of negative interest rates here in the U.S. They’ve expressed doubts that below-zero rates can become effective. In fact, he had a discussion last Friday with Alan Blinder, a former Fed Vice-Chair. During this conversation, Powell said that they tend to become detrimental to banks.
“We don’t think that’s an appropriate tool here in the United States. I would say the evidence on whether it actually works is mixed,” Powell started. “Some negative side effects” still exist, “as there sometimes are with these things,” he also said. “it’s just not clear to my colleagues and to me on the Federal Open Market Committee that this is a tool that would be appropriate to deploy here in the United States.”
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