Thursday, May 21, 2020

CBO and other economic reports show that a lower loss is STILL BAD

I want to take a second to discuss a common theme that I see in financial news these days. Somehow, we are to believe that “the worst is over” when it comes to our current COVID-19-induced recession. But this slant on economic stats ignores just how bad things really are, and will remain.

An example of this comes from a CBS Marketwatch article on Thursday that promotes a rise in the May IHS Markit’s manufacturing index for US companies.

But what does that “rise” in the index show? Merely that activity wasn’t falling as fast as it was in April. Things are still worse.
What happened: The survey found that 58% of firms reported a decrease in activity while only 15% reported an increase.

The new orders index increased 45 points to a reading of -25.7. The shipments indexed increased 44 points to -30.3. The employment index increased 31 points to -15.3.

Firms expect the current slump to last less than six months. The index for future activity rose 7 points to 49.7. Over 62% of firms expect increases in activity over the next six months, while 13% expect declines.
But again, that’s an increase from the historic depths we are in today. Things will still suck!

The IHS Markit report cited by CBS Marketwatch is more honest about this.
U.S. private sector firms reported a slightly slower rate of contraction of activity in May, as the economy began to reopen. That said, the fall in output was substantial, as both manufacturers and service providers indicated marked declines in client demand.

Adjusted for seasonal factors, the IHS Markit Flash U.S. Composite PMI Output Index posted 36.4 in May, up from 27.0 in April, but nonetheless indicating the second-sharpest decline in business activity since the series began in late-2009.

I also note this paragraph in the CBS Marketwatch report, where the Federal Reserve’s New York region also showed that the “growth” would still leave us way behind where we were at the start of 2019. And because it literally couldn’t get worse.
Big picture: A similar survey conducted by the New York Fed said conditions remained dreary, rebounding to -48.5 in May from -78.2 in the prior month. The coronavirus pandemic continues to weigh heavily on manufacturing. The bounce in May in the regional surveys is due in part to firms saying that activity is steady at zero rather than declining sharply last month, economists said.
When the financial news claims the economy is “improving” from the record declines that we saw, you need to ask yourself “improving from where?” Tens of millions of Americans are likely to still be out of work for several months, a reality that was reiterated by the Congressional Budget Office in a report issued this week.
During the second quarter of 2020, the labor market is projected to see the steepest deterioration since the 1930s. The unemployment rate is expected to average 15 percent, up from less than 4 percent in the fourth quarter of 2019. That surge reflects projected reductions of almost 26 million in employment and about 8 million in the size of the labor force (see Table 3).

Labor market conditions are projected to gradually stabilize in the coming months and begin to improve more materially after the third quarter of this year. Business activity will recover as the degree of social distancing diminishes, leading to an increase in the demand for workers. Although less than at its peak in April, some degree of social distancing is still expected to persist through the third quarter of 2021, partially constraining business activity and the demand for workers. In addition, the expected pace of labor market recovery is dampened by the prospect that many businesses may not survive the earlier, extended period of revenue loss. In CBO’s projections, the unemployment rate declines after the third quarter and reaches 8.6 percent by the fourth quarter of 2021, which is about 5 percentage points higher than it was in the fourth quarter of 2019. Additionally, about 3 million fewer people are projected to be in the labor force by the fourth quarter of next year.

The sharp downturn in economic activity and the rapid deterioration in labor market conditions are expected to have severe negative effects—both immediately and potentially over the long term—on many workers, households, and communities. The job losses have been concentrated in service-providing industries with low average earnings, so low-income households may lose a large fraction of their labor income in the near term. (As a whole, those households had experienced accelerated economic gains in recent years.) Moreover, both the reduction in the number of people employed in 2020 and the persistence of high unemployment through 2021 may have a negative effect on the job prospects and earnings of younger generations that will be felt long into the future. For example, college graduates and others who enter the labor market now are expected to have substantially lower earnings initially than those who entered when economic conditions were stronger. Some of those effects will continue for years.
Likewise, the CBO reported that it expects GDP to still be below the levels that we had in March at the end of 2021.

And it's worth mentioning that job losses and our current recession had already started by March.

The CBO assumes there will be aid given to state and local governments in the second half of 2020 to avoid severe cutbacks at that level in 2021. But if Moscow Mitch and the Senate GOPs get their way, maybe that assistance won’t be coming. If so, this would likely make the recovery weaker in the next 18 months, and unemployment will likely be even higher than 8.6% in 18 months.

There’s still this mentality on Wall Street and in a lot of media that tries to indicate that things will soon return to the conditions that we had as 2020 began. But that’s simply not true. Not with COVID-19 (which will likely still be in people’s minds in 6 months, and it is very possible that we will under a second wave of infections), and not with the economy, which will likely still have double-digit unemployment without the added assistance that is being pumped out today.

I think most of us are still in shock from the scale of the economic decline of the last 10 weeks, and if you haven’t been laid off (or even if you have been), and you aren't taking a historical look at these stats, it probably hasn’t sunk in just how bad things are. People also don't understand that these depressed conditions are going to stay for a long while, and the reality won't take hold until people begin taking in the sights of permanent closings of businesses and foreclosed homes. It hasn't happened yet, but it sure seems like it's coming.

That’s when you’ll see people really freak out, and get dark. And it might lead to a reaction that goes well past the right-wing Astroturfers and dead-enders who think removing Safer-at-Home orders are all we need to return to normalcy. Except this will be anger for a legitimate reason, and hopefully it'll be targeted at the incompetent Trump Administration and the corporate greed that are the real reason that we currently have the highest unemployment since the 1930s.

No comments:

Post a Comment