Tuesday, June 16, 2020

An Economic Recovery? If so, What Is the Shape? V, W, or Nike's Swoosh?

The May U.S. jobs report indicated the nation's economy added 2.5 million jobs, the highest monthly addition on record. This news emboldened the optimists who envisioned a V-shaped recovery, and dampened the pessimists who foresaw a W-shaped economic rebound. Other recent economic indicators support an economic recovery somewhere between the extremes, a Nike Swoosh, which would be a sharp downturn followed by a slow recovery.  
V-Shaped Recovery:
Record federal deficit spending via the CARES Act, and the Federal Reserve's support for ultra-low short and long-term interest rates, are punishing savers and rewarding spenders. Furthermore, the ending of the lockdown of most state economies is pushing consumers to spend a share of their pent-up demand. The biggest stimulus for the labor market will come at the end of July when the federal government's $600 weekly support for jobless workers receiving state unemployment benefits expire. U.S. equity markets are pricing in an economic revival with expanding business profits indicative of a "V."  
Nike's Swoosh-Shaped Rebound:
Even after adding 1.2 million jobs in May, the nation's leisure and hospitality industry has shed 7 million employees since Covid-19. Contrary to most recessions, this one was led by the consumer and there is little evidence from consumer spending data of a return to pre-Covid spending levels. State and local regulations have limited most businesses in this industry to approximately 50% of their pre-Covid-19 capacity.
Compared to pre-Covid-19 levels, U.S. bond yields at roughly half their yields, and gold prices up more than 7%, both safe-haven stashes for risk averse investors, continue to indicate that investors remain very, very cautious about the U.S. economy.
U.S. exports and imports both posted their largest monthly decreases on record as imports fell 13.7% between March and April and exports plummeted 20.5% during the same period of time. These are the largest declines since record-keeping began in 1992, and will continue to be a drag on U.S. economic growth.
W-Shaped Recovery & Recession Re-Visit:
Rising U.S. Covid-19 infection and death rates would put a dagger in the heart of any economic rebound. Growth based on federal government deficit spending and Federal Reserve's ultra-low interest rates is not sustainable. The U.S. and global consumers must return to work and spending. State economic lockdowns will guarantee a return to a recession as the economy reaches the top of the V.

Ernie Goss

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