At the end of the month, we will see the BLS announce a 30% + return on real GDP (the Atlanta Fed̵
Markets were concerned about a change in Fed policy that would withstand higher inflation, and that along with some recovery in depressed commodity prices and some food (supply-related) and used car increases caused interest rates to rise slightly in late September. Underlying inflation is non-existent and rents, which are an important part of the consumer price index (CPI), are falling. In addition, despite the word, the Fed expanded its balance sheet in mid-October to push the yield curve lower.
The best measure of economic health is employment, and on that front the news is not good. New unemployment claims continue at well over 1.2 million / week; the pre-virus norm is + 200K. When all claims are taken into account, the total amount is more than 25 million, a real unemployment rate of over 15%.
Stimulus’ impact on expenditure
On Friday (10/16), the news that retail sales rose 1.9% in September crashed stock markets early after several losing sessions during the week as hopes for an immediate further fiscal stimulus package disappeared. In a recent blog, I explained how consumption increased in August, even when incomes fell due to the large pool of savings stemming from the CARES law. There was still a small amount of savings left in that pool beyond what was the pre-virus norm measured by St. Louis Fed. I suspect the last of these “surplus” savings was spent in September, causing the unexpected increase in retail spending.
But even with the unexpectedly good retail sales details (up by 1.5% even ex-cars – the sale of used cars is on fire when the public avoids public transport), the markets ended flat on the day and down for the week. Despite all the hoopla surrounding the data releases, without stimulus, the economy would have contracted (by at least -10% according to economist David Rosenberg). Even with overall retail sales, the underlying economy is really in recession and will be there for a significant period of time. An economy that is not in recession does not need a Fed to pump up its balance and money supply. (The Fed added $ 75 billion to its balance sheet in the week ending Wednesday, October 14thth; no wonder interest rates are being pulled back over the yield curve!) An economy that is not in recession also does not need another fiscal stimulus package that the Fed (especially Powell) is asking for. Although it appears to have stopped for political reasons, it is likely to continue after 3 Novemberrd.
The pension scene
Interest rates rose over the past month, triggered in part by the Fed’s policy shift in the way inflation will affect monetary policy going forward, and in part by the FOMC (Federal Open Market Committee), which openly worried that there was a need for more fiscal stimulus but would not come in time (and subsequent President Powell’s promise to Congress that the Fed would monetize any fiscal deficit (his “hand in hand” comment)), and in part because of the expectation that any new stimulus would arrive after the election, regardless of who won (but a bigger stimulus if the Democrats win). Because a new stimulus would dramatically increase supply, prices began to run up in late September / early October. Consistent with its word, the Fed delivered the booty to push interest rates back over the last many market sessions.
There has also been some concern about the resurgence of inflation, another factor causing the recent mild rise in interest rates. This concern was initially raised by the change in how the Fed will target future inflation. We have seen some increases in the prices of raw materials and food. Many of the commodity peaks were simply a setback from major downsizing last spring. The price increases in food, especially meat, are largely due to supply issues, as processing plants addressed virus prevention issues. The headline PPI (producer price index) for September was + 0.4%. Ex-food and energy, however, it was very sweet + 0.1%. So no inflation to worry about at the manufacturing level. September’s CPI (Consumer Price Index) increased + 0.2% compared to August and + 0.2% ex-food and energy. Year over year, the CPI rose by 1.37%; again does not show any worrying trends. Rent and rent equivalent calculations (related to mortgage costs) make up more than a third of the CPI index. Rents are now deflating, especially in densely packed urban centers, and falling mortgage rates are having an impact on the mortgage calculations in the index. So it seems that measured CPI inflation will not be an issue for some time, at least until after we have reviewed the coming wave of postponements.
Unemployment, the real economic indicator
In order to measure the health of the economy, one must look no further than the state of the labor market. And on that front, the news is not good. At the state level, Initial Claims (ICs) jumped more than + 76K in the first full measurement week in October, and this is without any reporting from California. (IC data from California for the week of September 26thth has been used since October 8thth and October 15thth data releases covering weeks ending October 3rdrd and October 10thth. California is due back online for the October 22 data releasend, which covers the week ending October 17thth. There are likely to be significant upward revisions. Unless California found and limited a significant number of fraudulent allegations, Disney and the airline probably quit their IC numbers – we know soon!
The accompanying table and chart of state ICs show the flat to slightly rising right tail. “Normal”, i.e. pre-virus, appears in the left tail. Let’s also remember that +885K ICs are new layoffs, most of which took place in the previous week. Yikes! In addition, ICs under the CARES Act added the PUA (Pandemic Unemployment Assistance – program for self-employed, independent entrepreneurs and gig workers) an additional + 373K. While the PUA ICs fell -91K from the previous week’s + 464K level when the state ICs and PUA ICs are added together, the result is a mindset of +1.26 million ICs for the week of 10 Octoberth. That is 6.5 months after the first shock.
When the continuing requirements (CCs) are added to the ICs as shown in the chart and table at the top of this blog, there are still more than 25 million unemployed. While the “official” U3 number is 7.9% in September, the “real” unemployment rate is in the range of 15% -20%. The right side of the chart shows that while total unemployment is down from the peak of 32 million in June, the improvement stopped in September. The left tail of the chart shows the much, much lower pre-virus norm.
Finally, much of the decline in CCs in government programs seems to be an exhaustion of justification, not re-employment. The monthly BLS JOLTS (Job Openings and Labor Turnover Survey) report shows declining employment, and the various surveys from employment consultants continue to show significant levels of new layoffs.
- Do not be fooled by the retail sales data or talk about the return of inflation;
- Do not hold your breath or keep cash in anticipation of rising interest rates;
- The economy is in recession; we just did not feel it because of the CARES Act stimulus, but in the end we will do it because we have a huge unemployment problem;
- And then there is the impending draft crisis (on hold until the end of the year); there has not been much discussion about this and I wonder if it is priced in the financial markets;
- The CARES Act stimulus has covered the recession, and another stimulus, after the election, may further kick the can down the road, but free cash cannot continue forever without serious consequences;
- · The recession will continue as long as the virus persists (and we appear to be in another, revitalizing phase). A vaccine would help, but it can take years, not quarters, to get enough people to take it (give herd immunity) and then return to viral behavior.