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Grown-Up Problems: Millenials Face Economic Hurdles

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A new report released by New York City comptroller Scott Stringer is prompting the rest of the country to take a closer look at how the Millennial Generation will affect the country’s economy in the years to come.

More than any other study on the same subject, Stringer’s report – titled, “New York City’s Millenials in Recession and in Recovery” – managed to effectively flesh out the financial travails of Millenials all over the country and reiterate the fact their plight will make a huge impact on the nation’s economy.

Millenial Identity
First off, just who are the Millenials?

There are no specific dates for when this generation was (for lack of a better word) spawned. Various studies tag them as the people born between 1980 to 2000.

With around 80 million members, the Millennial Generation has already surpassed the Baby Boomers as the largest living American generation. Economists estimate that they collectively spend $600 billion annually. “By 2020, they could account for $1.4 trillion in spending or 30% of total retail sales,” noted Laura Shin in her Forbes article, “How the Millennial Generation Could Affect the Economy Over the Next Five Years.”

In her 2015 report, Beth Ann Bovino, Standard & Poor’s U.S. chief economist, theorized, “If the economy continues to strengthen, as Standard & Poor’s projects, there’s potential that Millennials could start making big-ticket purchases that contribute to economic growth. On the other hand, their student loan debt could keep them from spending and not buying houses, costing the economy.”

“Two-thirds of GDP (gross domestic product) is consumption, so we rely on people spending money,” added Bovino.

Then again, Millenials’ spending power may continue to be hampered by several factors that are specific to their generation.
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The New York Case Study
Stringer may have presented New York City’s Millenial crowd as a case study, but his observations apply to the entire country’s Millenial population. He wrote, “From 2007 to 2009, the nation suffered the worst recession since the Great Depression. During the same period, children of the Baby Boomer generation — a large population cohort known as the Millennials — began their working lives. Not since their grandparents or great-grandparents’ generation have young people entered adulthood during such adverse labor conditions.”

Jen Kinney, in her article, “New York City Has a Millennials Problem, presented an in-a-nutshell overview of the scenario that Stringer referred to. She noted: “The U.S. economy lost over 8.7 million jobs between 2008 and 2010, jobs not regained until early 2014. During those six years without net job creation, over 22 million Millennials entered their working years nationwide.”

Stringer pointed out that “the lingering impacts of the recession on this large group of young workers – and the national and local policies adopted to address their unique challenges – will reverberate through the national economy for decades to come.”

By the Numbers
As a result of the recession back in 2007 to 2009, many Millenials — even those with college degrees — were driven to take jobs in the so-called “low-wage industries.” It’s a trend that has persisted.

A report released by the Economic Policy Institute (EPI) explained, “Despite officially ending in June 2009, the recession left millions unemployed for prolonged spells, with recent workforce entrants such as young graduates being particularly vulnerable.”

EPI then revealed that for 2016’s college graduates, the unemployment rate is currently 5.6 percent and the underemployment rate is 12.6 percent.

Meanwhile, for young high school graduates, the unemployment rate is 17.9 percent and the underemployment rate is 33.7 percent.

EPI explained that “the high share” of unemployed and underemployed young college graduates and the share of employed young college graduates working in jobs that do not require a college degree “stems from the weak demand for goods and services, which makes it unnecessary for employers to significantly ramp up hiring.”

Bovino also warned that “continued low wages for Millennials could reduce U.S. GDP by as much as $244 billion through 2019, or $49 billion a year, relative to our baseline scenario.”

Student Loans

Further complicating Millenials’ economic predicament are their massive student loans.

As Bovino stated out in her commentary on Fortune: “Millennials are the most educated generation in American history, but it has come at a cost ranging in the hundreds of billions of dollars. Indeed, many of Millennials’ spending and saving habits can be attributed to this debt – a major determinant of current and future spending ability, given the length of loan maturities and weak post-recession wage growth to date.”

An online survey conducted online in February 2016 by research agency TNS on behalf of Citizens Bank revealed that Millennials “have an average student debt of $41,286.60.” This is higher than the national average amount of debt for college graduates, which the Department of Education determined as $29,400.

The survey also highlighted the fact that “59 percent of those polled have “no idea” when they will be able to pay back their student debt.”

What the Future May Hold

Although it may seem that Millenials have a lot of economic hurdles to deal with, there is still hope for some relief. “In the end, while the burden of student debt will eat into the purchasing power of many young Americans for some time, we expect the continuing recovery in the U.S. economy to afford this generation the eventual opportunity to transition into the traditional definition of full adulthood — and, in a virtuous circle, begin to buy the houses, cars, and other big-ticket items that will further stimulate economic growth,” Bovino said.

Millenials themselves should also be proactive and urge lawmakers to come up with national policies that will give them a much needed boost out of the economic rut that they’re in. In this endeavor, the fact that they are “the largest living American generation” could be their most valuable asset. They can be a formidable political force. In this case, there is strength in numbers.

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Economy

Fed Bank Predicts 53 Million Americans Out of Work, 32% Unemployment Rate

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Fed Bank Predicts 53 Million Americans Out of Work, 32% Unemployment Rate

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.

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Stocks Continue to Rally on Mixed News, Hopes For A Coronavirus Vaccine

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Stocks Continue to Rally on Mixed News, Hopes For A Coronavirus Vaccine

The stock market continued its week-long rally yesterday, with the Dow Jones Industrial Average climbing 690 points to finish almost 3.2% higher on a day that saw both good and bad news for the market.

The S&P 500 closed 3.35% higher and the Nasdaq gained 3.62% as the pending home sales index hit a three-year high in February, but oil prices continued to crater and the Dallas Federal Reserve reported that its manufacturing index fell well below expectations.

Oil prices hit an 18-year low yesterday, as the price of WTI crude fell to $20.09 per barrel, the lowest price since February 2002. Demand continues to disappear as nearly all travel is frozen amid the coronavirus outbreak just as the supply is about to explode as Saudi Arabia and Russia increase production when the current OPEC deal ends on March 31.

The Dallas Federal Reserve’s manufacturing activity index absolutely collapsed in March, measuring -70.0 compared to expectations of -10.0. New orders, capacity utilization and shipments all fell to their lowest readings since the Great Recession.

A handful of stocks climbed higher on positive news of clinical trials for a COVID-19 vaccine and the ability to rapidly test for the virus as well, but at least one analyst is skeptical the gains will last.

Johnson & Johnson (NYSE: JNJ) rose 8% after announcing it would begin human testing of a coronavirus vaccine by September and says it expects the first batches of a COVID-19 vaccine could be available for emergency use authorization in early 2021. The company also reported that it plans to produce as much as one billion doses of the vaccine.

Alex Gorsky, Johnson & Johnson’s Chairman and CEO said, “The world is facing an urgent public health crisis and we are committed to doing our part to make a COVID-19 vaccine available and affordable globally as quickly as possible.”

Abbott Labs (NYSE:ABT) climbed 6.4% after it received an emergency use authorization (EUA) from the FDA for its 5-minute COVID-19 testing kit, which it says it hopes to produce 5,000 per day starting on Wednesday.

“Abbott’s ID Now Covid-19 test will help battle the pandemic in real-time by bringing vital information in minutes to front-line clinicians who are working to stop the spread of the virus,” said John Frels, Abbott’s vice president of research and development.

Nigam Arora, investor and founder of the Arora Report says the revenues that Abbott Labs will see from sales of the 5-minute COVID test will be dwarfed by the losses it will see elsewhere as a result of the coronavirus.

And Arora says that Johnson & Johnson will be selling the vaccine at cost, resulting in no additional revenue for the company. Thus, the run-up in stock price is unwarranted in his opinion.

While investors and Wall Street analysts can debate whether or not the rising stock prices are warranted, the rest of us can at least benefit from these companies bringing forward new tests and treatments in the fight against COVID-19.

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The Fed is Propping Up Bond Prices, Are Stocks Next?

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The Fed is Propping Up Bond Prices, Are Stocks Next?

Last Monday the Federal Reserve announced that it would spend nearly $700 billion to buy up Treasurys and mortgage-backed securities as part of its “aggressive action” to soften the impact the coronavirus is having on our economy.

As part of the stimulus package, the Fed also said it would start buying exchange-traded funds (ETFs) that track the corporate bond market. For now, it appears the purchases will be limited to investment grade or highly-rated corporate bonds and won’t include more risky high-yield (or junk) bonds.

It’s the first time that the Fed has directly bought securities in an attempt to add liquidity and jump start a frozen market.

“This will provide much-needed liquidity to the bond market and to ETFs,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA.

Steve Blitz, chief U.S. economist for TS Lombard, says the Fed’s move is helping investors enter and exit a position if needed. “All of this is to make sure that people who want to sell have a buyer. The Fed is taking both sides of the market so people who need to raise cash can do so.”

It’s clear why the Fed prefers to buy corporate bonds through an ETF as opposed to buying bonds in individual companies. With one purchase order, it can impact the bond prices of hundreds of companies at once, as opposed to the time consuming task of identifying, pricing and then buying bonds of individual companies.

By moving into the ETF space and buying up bonds, the Fed may also be trying to calm a part of the market that has seen record outflows over the last few weeks. Just two weeks ago, the iShares iBoxx $ High Yield Corporate Bond ETF saw a $1.2 billion outflow, or roughly 8% of it’s total value.

The question becomes, if the market continues to slide as the coronavirus outbreak batters the economy, would the Fed extend its reach and start buying stocks via index ETFs?

It’s an unprecedented move, but then again so was buying bond ETF a little over a week ago.

It would allow the Fed simultaneously impact the stock price of hundreds of companies at once. With the SPDR S&P 500 ETF, the Fed could move the stock price of all S&P 500 companies with a single purchase.

The same would apply for all broad index ETFs like the Dow Jones Industrial Average (DIA) and Nasdaq (QQQ).

Vincent Reinhart, chief economist and macro strategist at BNY Mellon Asset Management, says it could be in the Fed’s playbook.

“Other central banks have done it. It’s the ETF route that the Bank of Japan has taken. I would not rule out them doing equities.”

Lindsey Bell, chief investment strategist at Ally Invest added “We’ve seen the Fed show that they’re willing and able to do whatever it takes to make sure the markets are opening in an efficient manner. They’re taking whatever steps they can. That would be new territory for the Fed, not that they’re scared of new territory.”

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