As we see just how deep our economic hole is, Wall Street ignores the reality

I keep reading financial news reports this week about how some economic indexes “improved” in May. But then you look at the actual reports, and it shows that things were worse than they were in April, and I think a lot of media and Wall Streeters don’t want people to think about just how much of a mess we are in.

Here’s an example of this “smaller decline” - May’s report from Marquette University on Milwaukee-area manufacturing. This index may have a higher number compared to the freefall in April, but Upper Midwest manufacturing was still getting worse by pretty much every measure.

The same trend showed in the national Purchasing Managers Index in manufacturing. Sure, it’s better than April, but “contraction” is still not what you want (except for inventories….which grew last month).

And the hole is so large that if we ever get back to growth, we’re still much worse off. In fact, the Congressional Budget Office said this week that due to what has happened in the last 2 ½ months, our economy will be damaged for a decade .

CBO’s May projection of real GDP in the second quarter of 2020 was $724 billion (or 13.3 percent) lower in 2019 dollars than the agency’s projection from January. Beyond the second quarter of 2020, the difference between those projections of real GDP shrinks, to $422 billion in 2019 dollars (7.6 percent lower in the more recent projection) by the end of 2020 and roughly disappears by 2030 (see Figure 3). As a result of those differences, CBO projects that over the 11-year horizon, cumulative real output (in 2019 dollars) will be $7.9 trillion, or 3.0 percent of cumulative real GDP, less than what the agency projected in January.

CBO reminds us that will be very far away from our pre-COVID economic conditions in 6 months, and it’ll take several years before the jobs and activity come close to where we were. It’s also remarkable that the projections downgrade inflation compared to the January report, which seems to go against any kind of rebound in demand and/or wages.

And we already knew that profits were in decline in the US before we got the full force of the COVID recession, as shown from last week’s updated GDP release. Profits didn’t grow on an annual basis for 2019, and fell bigtime by the end of March.

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) decreased $295.4 billion in the first quarter, in contrast to an increase of $53.0 billion in the fourth quarter (table 10).

Profits of domestic financial corporations decreased $67.4 billion in the first quarter, in contrast to an increase of $0.7 billion in the fourth quarter. Profits of domestic nonfinancial corporations decreased $169.5 billion, in contrast to an increase of $53.7 billion. Rest-of-the-world profits decreased $58.6 billion, compared with a decrease of $1.4 billion. In the first quarter, receipts decreased $72.7 billion, and payments decreased $14.2 billion.

Yet Wall Street keeps bouncing higher, including 267 points. And it's because traders are claiming the economy and profitability are going to spring back to life.

A restart of business activity from the closures due to the COVID-19 pandemic has been cited as the main reason behind the market’s ability to shake off a number of persistent worries of late, including Sino-American tensions and civil unrest in America.

“This has largely been about the pace of the economic restart, which appears to be coming online somewhat more quickly than believed to be the case even a month or six weeks ago,” said Bill Northey, senior investment director at U.S. Bank Wealth Management.

But this ignores that the “restart” is from a massive hole, and there’s little indication that any restart is going to fill a lot of that hole in 2020.

There’s only so much funny money that can be pumped in from Wall Street and DC before the bills come due and real money and revenue have to pay for it. People have to be going out for reasons beyond protests and spending actual money at some point, and that’s sure not happening yet.

It’s not just the pandemic and a president declaring war on his citizens that make me feel like I am crazy pills. The contrast between the rising stock market and the depressed real economy is also making me nutty these days.