That GDP Thing

July 30, 2020

Having spent many weeks looking for data, contemplating and warning about the effects of COVID-19 on GDP, the day has arrived.

The number itself is not really all that important, it is bad. (GDP declined by 32.9% in the second quarter on a year over year basis). The economy remains in very bad shape, both in the US and Canada and headlines designed to highlight hope are well meaning, but they lack the context of the strain on the finances of you and your neighbour.

GDP fell off a cliff

Also released this morning was the latest US employment data. That data shows that initial claims are (again, still) back on the rise, with 1.434 million Americans starting unemployment. The continuing claims number however gives a better sense of the damage being done. Almost 17 million Americans (up 537 thousand) are making continuing claims for unemployment. Those are only the ones that are being counted.

Continuing Claims for Unemployment are Still Terrible and Climbing Again

The plain simplicity of the GDP data fails to reflect the realities of the ongoing pandemic and the chilling effect it is having on economic activity, investment and social mobility. These effects will take months to play out and the short term data is lacking context.

The two ideas that need to be coordinated are the ‘new normal’ which really isn’t well defined at this stage, given all of the uncertainty related to the pandemic, and the social actions of people which are also poorly understood at this point. The short term measures such as car trips or restaurant bookings are very likely tied to people longing for the old normal. The short term rise in purchases of food, office chairs, computers and other ‘essentials’ is also tied to the adjustment phase.

The realities of at least 17 million unemployed people in the US and 2.45 million unemployed in Canada mean that without financial support from government, people will not be eating, or paying rent or buying the latest gadgets. (A google search for ‘food banks running out of food’ will help to clarify the severity of the situation on human lives).

This blog continues to make things sound dire, but it’s not just me. The data back up the idea that the world is beginning to look different. It was once said that if China’s growth dropped below 6% the world would stop growing. China’s growth dropped to 3.2% last quarter and they were one of the quickest to deal with COVID-19. In Canada, the new governer of the Bank of Canada, Tiff Macklem made this statement on July 15:

The early signs from the reopening phase are positive, but we expect the recuperation phase to be bumpy and protracted.”

A more recent statement by Jerome Powell, the Chair of the US Federal Reserve sounded a note that was similar in tone and scope:

On balance, it looks like the data are pointing to a slowing in the pace of the recovery. But I want to stress it is too early to say both how large that is and how sustained that will be”

The hopeful notes are ever present despite the shocking data. The actual statement from the Fed (released yesterday after their regular meeting) had a more realistic view of what is happening in the real economy:

Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year”

This all begs the question, “What is going on with the stock market”. If the justification for the valuations was that the economy was “firing on all cylinders” in 2018 and 2019 what would make investors believe that the current valuations make sense when the economy is seriously hobbled? After the release of the Fed statement, Jerome Powell offers a Q&A session and had this to say:

This pandemic and its fallout really represents the biggest shock to the U.S. economy in living memory”

Remain very cautious. The market is out of step with the economy and the downside could be very troubling when it occurs.

New Cases of COVID-19 Remain Stubbornly High

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