Random notes on the problems with the 2020 U.S. economy
I’ve been struggling to logically explain my gut feelings about the 2020 U.S. economy. Long story short, I’m bearish. I’ve felt this way since early Q1 2020. The goal of this research was to help me understand in more detail the forces at play that may be contributing to my gut feelings. By definition, this research is biased as it focuses exclusively on current economic problems and ignores any positive trends. If you’d like to explore the bad signs in the economy further, here are some of my notes.
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The financial sector isn’t like other sectors ⇒ If it fails, fundamental aspects of modern life could fail with it (e.g. loans to buy a house or a car, or to pay for college)
Just as easy mortgages fueled economic growth in the 2000s, cheap corporate debt fueled growth in the 2010s
The 2008 financial crisis was about home mortgages
Hundreds of billions of dollars loans to home buyers were repackaged into securities called collateralized debt obligations (CDOs).
The CDOs were attractive because they were “diversified” across housing market regions (i.e. the thought was that housing pricing fluctuated regionally, not nationally)
Often the same banks issuing the loans were also buying the CDOs
When the housing market crashed nationally, the diversification assumptions failed, and banks got hit big time, sometimes doubly
The next potential financial crisis could be about corporate debt
There are more than $1 trillion worth of leveraged loans to corporations that have been repackaged into securities called collateralized loan obligations (CLOs).
These leveraged loans are by definition higher risk because they are loaned to companies that are struggling
From investopedia: A leveraged loan is a type of loan that is extended to companies or individuals that already have considerable amounts of debt or poor credit history. Lenders consider leveraged loans to carry a higher risk of default, and as a result, a leveraged loan is more costly to the borrower. Default occurs when a borrower can't make any payments for an extended period.
The CLOs are attractive because, in theory, they are diversified across industry and geography to minimize the chances that all of the loans will be affected by a single event or chain of events.
If the economy were to crash and we were to experience mass corporate defaults/bankruptcies across all geographies and most industries, banks could get hit big time (again), sometimes doubly
The prices of AAA-rated CLO layers tumbled in March, before the Fed announced that $2.3 trillion of lending would include loans to CLOs. (But this is controversial and may not happen again)
Loan defaults are already happening.
There were more in April than ever before.
Several experts told the author they expect more record-breaking months this summer.
In calculating the risks of reopening the economy, we must understand the true costs of remaining closed.
If we continue to keep the economy closed for coronavirus, it could get even worse.
At some point, they will become more than the country can bear.
Fed Warns of ‘Extraordinarily Uncertain’ Path to Recovery
In a semiannual monetary policy report to Congress, the Fed said the nation’s gross domestic product would probably contract “at a rapid pace” in the second quarter after “tumbling” in the first.
The Fed said that, domestically, “the path ahead is extraordinarily uncertain.”
According to the report:
“Importantly, some small businesses and highly leveraged firms might have to shut down permanently or declare bankruptcy, which could have longer-lasting repercussions on productive capacity”
“There is uncertainty about future labor demand and productivity as firms shift their production processes to increase worker safety, realign their supply chains or move services online”
Noted that employers had cut about 20 million employees from payrolls since February, reversing a decade of job gains.
While the unemployment rate eased to 13.3 percent in May after jumping to 14.7 percent in April, the Fed called that rate “still very elevated” (with low-wage jobs getting hit the hardest)
Those still in the labor market are experience downward pressure on wages
Fed Warns of Significant Financial-Sector Vulnerabilities
The Federal Reserve put a spotlight on job losses and risks to the financial sector in its semi-annual report to Congress released Friday (6/12/2020)
Financial-sector vulnerabilities are expected to be significant in the near term
The Fed’s policy committee this week voted to keep interest rates near zero and central bankers penciled in no rate hikes through 2022.
The Fed said “a wide variety of data reveal an alarming picture of small business health during the COVID-19 crisis.”
In his press conference, Fed Chairman Jerome Powell suggested it will take years for the economy to regain the more than 20 million jobs lost due to the coronavirus-induced recession ⇒ and he specifically called out lower-income workers and minorities
What to Make of the Rebound in the U.S. Jobs Report
Job losses in March (-1,373,000) and April (-20,687,00) nearly wiped out the previous 113 months of job gains, but May showed a partial comeback (+2,509,000).
2.5 million jobs were added in May and the unemployment rate fell to 13.3 percent.
Many of the gains came in restaurant/bar work (1.4 million)
(BUT data collection issues may have caused an underreporting of the unemployed in May… June numbers will be telling)
Tens of millions are still out of work, and the unemployment rate remains worse than in any previous post war recession.
“The economy is still being very much buffered by stimulus,” said Michelle Meyer, head of U.S. economics at Bank of America. “When that starts to wane, we will learn a lot more about the underlying health of the recovery.”
The longer-run outlook is uncertain ⇒ If business stays at its current (low) level, many businesses will struggle to make a profit (which is not sustainable…)
Local governments are starting to be affected due to budget shortfalls.
COVID-19 will end some jobs, and transform others
From March through early May, more than 36 million workers sought unemployment aid.
According to a recent survey:
About three-quarters of staffing cuts from March 1 to mid-May were considered temporary layoffs or furloughs ⇒ so these jobs may return
But economic uncertainty and the possibility of an extended transition to the post-COVID raises the chances of permanent job losses
The researchers estimate 42% of pandemic-related layoffs will be permanent
Many new jobs are being created in new high-demand sectors (healthcare, delivery, household supplies)
One-Third of U.S. Job Losses Are at Risk of Becoming Permanent
The Bloomberg Economics research found that ~50% of U.S. job losses come from the combination of lockdown and weak demand, 30% from the reallocation shock, and 20% from high unemployment benefits encouraging workers to stay home.
A major worry is “hysteresis” ⇒ which occurs when skills are lost and higher unemployment becomes entrenched
The next big problem for the economy: Businesses can’t pay their rent
Nearly half of commercial retail rents were not paid in May
Overall, Datex Property Solutions found that 58.6% of retail rents were paid in May.
When businesses like Ross Stores and T.J. Maxx stop paying rent, it sets off a chain reaction. Those affected include:
Landlords don’t get paid
Commercial real estate values decline
Property managers have less work
Landscapers have less work
Developers have less access to credit for new projects
Local governments receive less property taxes
According to Datex Property Solutions, the following stopped paying rent entirely in May:.
Bed Bath & Beyond
Famous Footwear
H&M,
The Gap
Movie theaters AMC and Regal
Gyms like 24 Hour Fitness
Starbucks paid May rent but also sent a letter to landlords requesting 12 months worth of concessions starting June 1
For many of these firms, survival is the goal for 2020.
Ripple effects of downturn show pandemic’s early economic toll was just the beginning
Plunging consumer and business spending spreading across the economy
Corporate catering has all but dried up.
Unemployed has slowed consumer spending
More than $6.5 trillion in household wealth vanished during the first three months of this year as the pandemic tightened its hold on the global economy, the Federal Reserve said this week.
“This is the biggest economic shock in the U.S. and in the world, really, in living memory,” Fed Chair Jerome H. Powell said Wednesday. “We went from the lowest level of unemployment in 50 years to the highest level in close to 90 years, and we did it in two months.”
More workers now losing hope of getting back jobs
It took five years for the economy to regain the 8.8 million jobs it lost during the Great Recession.
This time, ~20 million jobs remain lost.
According to a University of Chicago study: “The job picture is horrible,” said Nicholas Bloom, an economist who worked on the research. “I don’t see the U.S. labor market recovering back to full employment for another five to 10 years.”
Some jobs are being created in booming industries, but many people are reluctant to take lower-paying work until they know for sure their old jobs are gone for good (they're also reluctant to walk away from getting a $600 weekly federal supplement to state unemployment benefits, which expires after July)
The Coming Mental-Health Crisis
Before the coronavirus crisis, America’s infrastructure for mental-health and addiction services was fragmented, overburdened, and underfunded.
Coronavirus has put more stress on a broken system.
Prior to the pandemic, Mental health disorders were already at the top of the list of costly medical conditions in the U.S. at $201 billion (source)
Due to the pandemic, many community behavioral health care organizations are having to cut back services due to economic issues (source)
The pandemic is forcing practices to reduce services, provide care to patients without sufficient protective equipment, lay off and furlough employees, and risk closure within months.
According to recent data from the Kaiser Family Foundation:
When asked if worry or stress related to the coronavirus had hurt their mental health, 4 in 10 reported that worry or stress had led to sleep problems.
Others reported that the coronavirus had caused them to experience a variety of health-related ills, such as frequent headaches or stomach aches and increased alcohol or drug use.
A secondary pandemic of mental health problems will follow the virus ⇒ this could lead to increased suicides, social issues, and further economic damage
Why the stock market is up even with historic job losses
Some people say there are clear reasons why stocks have rebounded, and can continue to move higher:
The slowing rate of infection
Signs that the virus is manageable
The gradual reopening of states’ economies
The jobs data is backward-looking ⇒ the market is discounting what’s going to happen six months from now, when most states will be getting back to business.
3. Low interest rates and stimulus
Government stimulus is expected to bridge the gap
And interest rates are going to be low (near zero) for a long time