The number the media, and apparently much of the population, fixates on daily is the new virus case count in the U.S. While cases have clearly skyrocketed, deaths from the virus continue to fall. Perhaps the case counts are a function of the level of testing. First Trust’s economists recently published some interesting statistics:
- on Monday, July 6th, deaths were -86% below the Monday, April 20th peak.;
- hospital capacity, nationwide, still appears manageable – albeit some specific locations may have hospital capacity issues;
- The skew of deaths toward the elderly is also significant. The total percentage of deaths/confirmed cases (138,782/3,630,587 as of July 18) is 3.8%. Of those that have died, 33.2% were 85 years old or older, and 92.5% of deaths are in people over 55 years old.
Consider that confirmed cases represent just over 1.1% of the total U.S. population, but field tests are now showing that up to 20% of those tested are positive for the virus. While there are issues in assuming that 20% of the population have already had the virus (some think that there are a huge number of asymptomatic carriers), if that is anywhere close to reality, then the overall probability of dying from the virus is 0.04% (.0004), and if one is under 55 years old (most of the working aged population), then that probability falls to .003% (.00003, i.e. 3 per 100,000 who contract it). Even within this younger demographic, only those with compromised immune systems have any real risk. The 20% assumption may be high (there are reasons people get tested), but even at 10%, the younger demographic has little death risk.
Market observers are now using high frequency data markers to gauge the state of the economy. Sometimes, even small deviations from expectations in the economic data results in outsized financial market reaction.
- Retail Sales: While falling -5.5% from the week ending July 4th (holiday week) to the week ending July 11th, retail sales were still +4.7% higher than the same 2019 week, and up +7.5% M/M in June (May was still in the depths of business closures). On the surface, this looks promising. But, let’s not forget that consumer income has not yet been impacted because of government money drops. As discussed below, there are still 32 million people unemployed, and there will likely be a large negative impact when government largesse returns to “normal” (perhaps after the elections);
- Hotel Occupancy (week ended June 27th): While up from the April lows, there is only 46.2% occupancy vs. 84.9% a year earlier;
- Open Table (July 13): this indicator shows a -66.2% Y/Y change. The M/M change was -1.2%; looks like the daily media drumbeat on new cases has had an impact;
- TSA checkpoint data (July 13): This shows the number of air travelers, and it was up 5.2% W/W and 61.7% M/M. But, because the denominator is so small, the percentage changes become almost meaningless. Y/Y traffic is still off -73.2%. No wonder United and American Airlines AAL are throwing in the towel and have pre-announced significant layoffs.
The conclusion here is that, after an initial pop, and especially with renewed business restrictions, the Recovery, at best, has flattened.
As I have maintained in this blog, employment is the most important gauge of the health of the economy. The more reliable state data from the traditional unemployment insurance programs is still showing significant Initial Claims each week (1.300 million the week of July 11th). There now is almost no downward slope, as the prior two weeks were 1.310 and 1.413 million. And, while Total Claims, as shown in the table and chart (sum of Initial Claims and Continuing Claims) have declined eight weeks in a row and in nine of the last ten, the chart shows the deceleration in the rate of decline in unemployment.
When the less reliable data on the temporary PUA program (Pandemic Unemployment Assistance – via the CARES Act) (less reliable because not all states are reporting and some states report more detail than others) is added to the state data, as shown in the next table and chart, one gets a flavor of just how deep the unemployment hole has become. Worse, beginning in June, total unemployment (or at least the claims) began to rise again. One of the emerging trends is that large companies, which had been hoping for the promised “V”-shaped recovery, have now given up and will start laying off. United and American Airlines are good examples. In addition, the approaching end of PPP may have a similar effect for mid-size and small businesses that are still alive.
Debt – The Fed Continues to be Nervous
For the banks, defaults haven’t yet become a huge issue due to forbearance. That will soon be ending. In the past week, the major banks reported Q2 results, and all significantly bolstered their loan loss reserves. In May, more than 100 million debt payments were missed. The consumer loan industry says it takes 180 days to deal with and resolve delinquent accounts, so we really won’t know the extent of consumer issues until Q4/Q1. I suspect the same is true of commercial loans.
Meanwhile, the Fed continues to worry. In recent Congressional testimony, former Fed Chairs Bernanke and Yellen warned that “the U.S. economy is facing deep and permanent economic damage” (i.e., certainly no “V,” and perhaps no “W”) without further significant fiscal and monetary stimulus including the expanded unemployment benefit program and providing aid to state and local governments. In fact, Yellen worried out loud about probable large layoffs at the state and local levels without such aid. Bernanke, echoing those famous words of former ECB President Mario Draghi, said Congress and the Fed should do “whatever it takes.”
The Fed’s Beige Book, a report on local conditions by the 12 Regional Federal Reserve Banks (published eight times per year) emphasized “uncertainty” emanating from businesses in their purview. Here are some excerpts:
“Most Districts reported that manufacturing activity moved up, but from a very low level;”
“Outlooks remained highly uncertain…;”
“Employment increased on net in almost all Districts…However, payrolls in all Districts were well below pre-pandemic levels. Job turnover rates remained high with contacts across Districts reporting new layoffs;”
“Contacts in nearly every District noted difficulty in bringing back workers because of health and safety concerns, childcare needs, and generous unemployment insurance benefits.”
Bankruptcies and Debt Concerns
As I’ve shown over the past few blogs, bankruptcies continue to trend up. It will take years for the damage done to the economy by the lockdowns to be recouped. The lives and livelihoods of millions of citizens have been transformed (many ruined) overnight.
We are just beginning to see the early symptoms of debt destruction, and we are going to see the impacts of such debt destruction on many of the traditional sectors, including the financial ones. These impacts will have long lasting effects. Meanwhile, the Fed has convinced market participants that there is no risk, and that the Fed has their backs. The result is that yield differentials between safe and highly risky assets have all but disappeared – at least their spreads have come way in. In the table and chart below, bankruptcies (from the Bloomberg database) are trending up.
The implications for interest rates are clear. More and more debt (corporate America including the zombies and the federal government) means that future interest rates can’t rise lest interest payment burdens become unmanageable and turn the economy south.
- With hindsight, the probability of death from the virus for most of the working aged population appears remote (minuscule);
- The economy hit zero in April, and the May/June re-openings led to the early up-leg of a “v,” but this nascent recovery now appears to be stalling as governors decide to re-restrict businesses;
- Employment numbers, too, are stalling. Companies are beginning to give up hope for a rapid recovery and are setting up for a long period of economic softness (i.e., they are starting to think about major layoffs);
- Debt issues are just beginning to emerge and will come front and center in Q4/Q1. The Fed sees this as do former Chairs Bernanke and Yellen.