May 7th Update:
Here is a look at the continuing claims for unemployment . . . in case you think that we are going back to normal quickly. It is worth noting that we are eight weeks into a shutdown, that’s 15% of the year, and the likelihood of the US or Canada reopening all of their businesses in the coming 3-4 weeks is essentially zero. Partial reopenings are starting, and absent a second wave of COVID-19, we will likely get back to completely open around July or August. From there activity will still be restricted both by regulation and general consumer fear and uncertainty. I would use a figure of 90% of pre-COVID consumer activity as a worthy guesstimate for the remainder of this year.
In any case here is a link to the chart, and the latest graphic
April 25, 2020
The COVID-19 crisis has brought about a lot of firsts, from border closings, to national shut-downs to oil prices, to unemployment.
The oil market received most of the attention last week for a truly disastrous decline in the May futures contract to negative values. (Those who didn’t sell their contracts in positive territory had to pay people to take their oil from them. Interactive Brokers estimates uncovered losses for it’s clients at $88 million. Clients in China are said to be nursing losses of more than $1 billion.)
These losses highlight a couple of very important issues. Markets are undergoing change that may be very hard to predict and when uncertainty overwhelms normal patterns, the outcome can bring massive losses.
The pain on ‘main’ street, where employees are suffering from loss of income and uncertainty over their costs will have similar effects on individuals. While those losing their jobs are not likely to suffer ‘large’ losses, they can be catastrophic (loss of home, no access to food, healthcare, etc.) and when aggregated, the pain to the economy may cause significant harm to corporations.
What could cause that to happen? Unemployment is an early indicator of stress on ‘main’ street, and frequently unemployment grows slowly as economic conditions worsen. Below is a chart of a metric called Continuing Unemployment Claims during the 2008-2009 financial crisis. Note how claims were really low in April 2007, and then started climbing gradually as the economy worsened. The value of the S&P 500 Index is overlaid in red.
The current situation is quite shocking by comparison. Here is the same chart for the last three years.
It’s pretty shocking to see such a massive rise in claims for jobless benefits, but what is really difficult to interpret is the scale of that jump. Here is a chart of both periods to provide scale. The continuing claims for unemployment last week were more than twice as high as the worst week during the 2008 financial crisis.
Claims for unemployment benefits will impact another metric called Non-Farm Payrolls, which is released monthly by the Bureau of Labor Statistics in the US. The next scheduled release is May 8th. Here is what that looks like on a long term chart. That first red down bar (last bar on the right) was for the period ending in March. But it only accounted for 1.5 million of those new unemployment claims. The new claims in the past four weeks have added about 14 million to the number. That will, at least in theory, reduce employment to the white arrow on the chart. That’s bad news.
The hope of course is that these job losses don’t last, but there are many indications that ‘main’ street will take a long time to recover. By comparison, the last economic downturn used $4 trillion of excess government spending over 4 years to reduce continuing claims by half. In the current malaise governments have already promised almost $6 trillion of support for markets (only some of which will go to individuals directly) and the pain is just starting.
Given the speed that the economy has come to a halt, and the lack of any meaningful precedent, it is difficult to estimate how quickly business will return to normal. A few factors can be examined however and here are a few worth examining.
- China’s recovery – China shut down a significant part of their economy as the virus spread through Wuhan, and they kept it shut down very effectively until the virus was under control (at least reportedly). That economy is now opening up but anecdotal reports suggest things are not back to normal, with travel restrictions, uneven participation in jobs and plenty of nervous people. Chinese exports and imports declined less than expected in March but the rest of the world was in the early stages of their shut down so there may be more bad news to come.
- World Trade – Examining Chinese exports and imports is not the only important measure. Europe, North America, the middle east and Africa all have complex interconnected networks of trade as a result of four decades of intense increases in globalization. China may want to export products to others, but with those economies shut down, there are problems with the supply chain and of course demand for many non-essential products has collapsed. The Baltic Dry Index shown below is a measure of the cost to buy space on a cargo ship. As prices drop, there is more capacity for trade. The decline started last summer and turned around just as the outbreak began. There is evidence that this is a result of rushing to move products before shutdowns began. But world trade was already showing signs of slowing before the COVID-19 crisis.
- Foreign Sales – Globalization has resulted in distributed manufacturing and sales to foreign nations have also benefited. In 2018 about 42% of sales for S&P 500 companies were to foreign countries. As those countries undergo their own shut downs and versions of shelter in place, sales are likely to be down substantially.
- Consumers are critical – The most prominent measure of economic activity is gross domestic product (GDP). In the US, consumer spending makes up 70% of that activity. It is too early to know how significant Personal Outlays will be impacted, but about 30% of spending went to goods and 70% to services. While the purchase of goods is still happening, many non-essential services have been shut down. It wouldn’t be out of the question to see these down sharply.
- Savings – The economy is increasingly split between those with financial security and those without it. Those without financially security increasingly rely on lower paying jobs in service industries. Their financial hardship is likely to get worse, but those with more secure jobs, so called ‘white collar’ roles are less likely to be negatively impacted during a short crisis. They will be unable to spend as they usually do and may actually be saving money. It is speculation to assume they will return to their normal spending habits when the crisis recedes.
- Oil – As mentioned earlier, there is a dramatic and significant decline in the consumption of oil and this will result in significant loss of jobs, many bankruptcies and significant declines in profits (dividends, investment, etc.). Official statistics suggest there were 145,000 people employed in the oil and gas extraction industry in 2018, and as many as 600,000 may be employed when including other parts such as pipelines, oil field services and so forth. Last month, one estimate was that 200,000 jobs would be lost due to the rout in energy prices.
- Bankruptcies – One focus of the government programs to keep people on payrolls is to support businesses without strong balance sheets that would have to furlough staff or declare bankruptcy without help. Help has been provided. For some, it won’t be enough. Many businesses will use these funds to endure as long as possible, but some will not survive despite the help. Neiman Marcus (14,000 employees) is supposedly preparing a bankruptcy filing, while Nordstrom (75,000 employees) and JC Penney (90,000) are expected to do the same soon. Other well known brands such as AMC Theatres (4,000 employees), Rite Aid (53,000) and Best Buy (125,000 employees) are very close to the edge. These companies have very large staff. Other significant businesses such as car makers (GM with 164,000 employees and Ford with 190,000) will be hard pressed to cover their costs with severely declining auto sales. Companies that are currently unlikely to go bankrupt such as Boeing (161,000 employees) will face years of difficulty as the airline and travel industries recover.
- Banks – Of course this will all lead to losses at financial institutions and sooner or later the risk will come back into the market, raising interest rates, at least for consumers, ultimately impacting consumption and reducing employment.
There are more, wide ranging variables to assess the impacts on the economy, but the effect on employment appears to be just beginning. The longer COVID-19 remains a risk to the health of individuals, the longer it will take before lives and commerce return to normal. This will govern employment for many months in the future and potentially many quarters.
Addendum . . . China looks to be suppressing how bad things are on the employment front in China. They only shut down a very small portion of their country…