Thursday, May 28, 2020

Which Letter Will Describe This Recovery?

Popular Economics Weekly

The Conference Board’s consumer confidence survey should help to predict the shape of this economic recovery from COVID-19. Economists usually described it as a letter in the alphabet, and I believe it will mirror the degree of “uncertainty” felt by consumers. Looking at past pandemics hints at what its shape might be.
In the words of Lynn Franco, Senior Director of Economic Indicators, “Following two months of rapid decline, the free-fall in Confidence stopped in May…Short-term expectations moderately increased as the gradual re-opening of the economy helped improve consumers’ spirits. However, consumers remain concerned about their financial prospects…While the decline in confidence appears to have stopped for the moment, the uneven path to recovery and potential second wave are likely to keep a cloud of uncertainty hanging over consumers’ heads.”
Economists are therefore trying to determine if the US economy sinks back into recession in a second wave of infections in the fall, or even a third wave nest spring, as in past pandemics. Right now, some economists are predicting a ‘V’ shaped recovery with GDP growth gaining traction after two quarters of negative growth.

Just under half of 45 economists responding to a Reuters poll earlier this month said the U.S. economic recovery would be “U” shaped, which probably means at least two quarters of negative growth, but a very slow recovery. Ten of those polled said it would be “V” shaped, and five said it would be “W” shaped.

Fed Chairman Powell in recent comments at a press conference following the U.S. central bank’s latest policy meeting indicated he sees even more disruption than even the “W” camp. Powell said he believes the economy may go through a series of peaks and troughs for at least a year or more as the world battles to keep the virus under control.
“John Kenneth Galbraith famously said that economic forecasting exists to make astrology look respectable,” said Powell. “We are now experiencing a whole new level of uncertainty, as questions only the virus can answer complicate the outlook.”
This happened with the 1918-20 Spanish Flu pandemic that killed some 700-900,000 Americans. Its fall resurgence in deaths after a summer created an 18-month recession from January 1920 to July 1922. It was considered a mild recession with GNP growth falling approximately 8 percent.

A chart of the Spanish flu combined with the DOW-Jones Index shows how the stock market behaved during that time—the DOW fell with every resurgence of deaths. It wasn’t until the third death rate spike began to subside in early spring of 1919 that the DOW rose, though economic growth didn’t resume until the end of the recession in 1922, and the decade became known as the “roaring twenties”.

Two lesser-known pandemics based on bird flus in 1958 and 1968 caused more than 100,000 deaths in the US.

In February 1957, a new influenza A (H2N2) virus emerged in East Asia, triggering a pandemic (“Asian Flu”). It was first reported in Singapore in February 1957, Hong Kong in April 1957, and in coastal cities in the United States in summer 1957. The estimated number of deaths was 1.1 million worldwide and 116,000 in the United States.

Several short and mild recessions followed the two pandemics; the first in 1958 when GDP growth was a negative -1.54 percent in Q1 1958. GDP growth began to plunge again in Q1 1968 following the second Avian flu pandemic that killed approximately100,000 in the US, and ended with the 1970 recession.

The point is pandemics have always caused a substantial drop in GDP growth, and this pandemic is shaping into another Great Recession lasting at least two quarters, before beginning to recover in the fall or winter.

That is why Dr. Fauci has been so vocal in supporting continued vigilance and preparedness for an additional outbreak.

And Dr. Rick Bright, the recently transferred director of Biomedical Advanced Research and Development Authority director at HHS said, “The mortality of the pandemic could be “unprecedented” and ultimately outstrip the 50 million casualties of the 1918 influenza epidemic without a science-based national response to the pandemic.”

It’s going to be a difficult call, in other words, as to which letter will better describe the length of this recession due to the novel coronavirus.

Harlan Green © 2020

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Tuesday, May 26, 2020

Will Those Jobs Return?

The Mortgage Corner

Initial claims for unemployment benefits fell by just 249K to 2.438 million in seasonally adjusted terms in the week of May 16, as the businesses begin to reopen in all 50 states.  The aggregate level of new claims not seasonally adjusted climbed to an actual 4-week high of 4.4 million when applications under federal programs are included. 

And more than 38 million workers are now out of a job, at least temporarily, in the latest week’s initial unemployment claims.

However getting them back to work will be far harder than separations, especially if congress cannot agree on another aid package to extend unemployment benefits, Personal Payroll Protection (PPP) to small businesses, and aid to states in addition to the just-passed $3 trillion bill.

Republicans meanwhile are holding up more aid, because they want workers back to work sooner when their current benefits run out, regardless of the still rising infection and death rates in many states.

But what if there are no jobs to come back to? Without more aid, states that hire and pay our essential workers (eg, Police, Fire, and health care workers) will run out money and have to reduce their payrolls. The same also applies to the PPP participants that wish to retain their employees.

Why would Republicans want to “cut off their nose to spite their face,” as the saying goes, after months of fiddling while America burned?

The latest infection data analysis is staggering. If the country had begun locking down cities and limiting social contact on March 1, two weeks earlier than most people started staying home, the vast majority of the nation’s deaths — about 54,000 — would have been avoided, reported Columbia University disease modelers.

And if many essential workers no longer have jobs, especially those workers that keep us safer and healthier, then a real recovery could be years away.

Workers can’t spend what they don’t make, which Roosevelt understood very well during the Great Depression. So he had government create millions of jobs building dams, monuments, energy grids, and planting trees; any work that allowed Americans to continue to feed their families.

And here’s another irony. Republicans support the de facto civil war between red and blue states when a viable recovery will only happen with a united effort, just as we won’t conquer the COVID-19 pandemic without a united effort in testing, contact tracing and quarantining the infected.

We cannot allow the unemployed to remain unemployed for too long. This lessens the demand for producers to produce, which in turn creates more layoffs instead of hires, which lowers Gross Domestic Product (GDP) growth. The Great Recession lasted 18 months, until June 2009 before growth was restored, yet employment didn’t return to prior levels for five years.

The Labor Department (BLS) reported unemployment rates were higher in April in all 50 states and the District of Columbia that were also higher from a year earlier. The national unemployment rate rose by 10.3 percentage points over the month to 14.7 percent as we reported last Friday and was 11.1 points higher than in April 2019.

Three states exceeded a 20 percent unemployment rate already; Nevada, Michigan and Hawaii.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate after inflation) in the second quarter of 2020 is -41.9 percent May 19, up from -42.8 percent on May 15.

Next Thursday’s first estimate of Q2 GDP growth will be the initial indication of just how weak are the job numbers for May. The Labor Department’s unemployment rate won’t be out until June 5. They don’t look good, with estimates as high as a negative -20 percent unemployment rate, or even --25 percent as in the Great Depression.

The powers-that-be must stop their fiddling, in other words, and cooperate in crafting programs that enable workers to get back to work safely, and consumers to shop without the fear of contagion, the same cooperation that’s needed to bring down the death rates from COVID-19.

Harlan Green © 2020

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Thursday, May 21, 2020

Consumer at Center of Any Recovery

Financial FAQs

The American economy has depended on consumers’ health, and consumer spending since the 1950s, really. Consumers generate some 70 percent of economic activity from their purchases, with government spending and capital expenditures in the private sector generating the rest of the activity.

Yet there is much doubt that American consumers will be in any position to return to their spending ways once COVID-19 is sufficiently tamed (meaning testing, tracking and quarantining programs in all states are fully operational). Consumers will feel reassured when it is safe to return to work and consume again.

We save more and spend less in times of worry, which depresses the demand for goods and services. And any diminishment in demand caused by their insecurities diminishes the production of those goods and future investment that would expand economic growth.

There is now a tremendous worry that consumers may stay-in-home for a prolonged period because of the pandemic. The personal savings rate has jumped from 8 to 13 percent just in March, when it was as low as 3 percent during boom times leading up to the Great Recession. They weren’t saving during those heady times of the housing boom and bust when housing prices were rising in double digits.

But the lower-income earners haven’t recovered, and some 40 percent of households have almost no savings to weather this downturn.

The latest retail sales tell us what is happening with consumers. Retail sales plunged 16.4 percent in April, by far the biggest drop on record and another reflection of the severity of the coronavirus pandemic on the U.S. economy. They were nearly double March’s revised decline of 8.3 percent. Spending at restaurants and bars fell by about half from a year ago, while clothing store sales slumped 89 percent due to the work lockdown and stay-at-home rules.

That can be counteracted by programs that reassure consumers. For instance the CARES Act prolonged unemployment benefits to July or longer, but need to be extended for at least another six weeks..

But a far more active federal government that develops a real social safety net with far fewer holes is the real answer.

There are some basic elements that might keep consumers from saving too much for a rainy day, if it is being saved for them by effective government social programs, like some form of universal health care that insures as many Americans as possible from expensive medical bills.

Then a much expanded education system that insures a good education for all Americans through high school, and even two-year community colleges to increase their skills. (Community College’s would be tuition-free, in other words.}

What else would reassure ordinary citizens? A safer international environment is being threatened by nationalist and populist governments that have closed their borders to any kind of international cooperation. But COVID-19 is stopping that fragmentation of necessity, as countries must work across borders to share medical science that saves their own populations from higher death rates.

We therefore see a rebuilding of the international supply chain that produces most consumer products, as well. Those products will continue to be produced overseas because of cost factors, no matter how many tariffs Trump imposes on the countries that manufacture them.

Mohamed El-Erian, former CEO of PIMCO and Chairman of President Obama’s Global Development Council, has worried about the damage COVID-19 has done to global growth, and the supply chains that connect what has become a global economy.

“Having already been buffeted by two big shocks in the last ten years, the global economy’s highly interconnected wiring is suffering a third because of the COVID-19 pandemic,” he said in a recent Project-Syndicate article. “Globalization thus faces a three-strikes-and-out situation that could well result in a gradual but rather prolonged delinking of trade and investment, which would add to the secular headwinds already facing the global economy.”

Those “headwinds” include the possibility of greater geopolitical conflicts and increased poverty levels of poorer countries from a prolonged slump in foreign trade and investment. Keeping the international supply chain from breaking is an absolute necessity for maintaining worldwide peace and prosperity, in spite of the backlash against globalization by populist governments.

I have cited NYTimes’ commentator Peter Goodwin before, when he said, “For seven decades after World War II, the notion that global trade enhances security and prosperity prevailed across major economies. But in many countries—especially the United States—a stark failure by governments to equitably distribute the bounty has undermined faith in trade, giving way to a protectionist mentality in which goods and resources are viewed as zero-sum.”

We cannot allow the “protectionist mentality” to continue, in other words, if we are to recover from what Mother Nature has thrown at us.

Harlan Green © 2020

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Tuesday, May 19, 2020

In The Age of Anxiety

Popular Economics Weekly

We are now in a full-blown “Age of Anxiety”; not the first, of course. There was as much anxiety during the 1918-20 Spanish Flue pandemic that reportedly killed 50 million in a series of worldwide outbreaks lasting more than two years.

If we do not find ways to lessen anxiety in this age due to the novel coronavirus pandemic, we might seriously experience what Dr. Rick Bright, who was recently transferred from his position as Biomedical Advanced Research and Development Authority director at HHS has described as “the darkest winter in modern history.”
“The mortality of the pandemic could be “unprecedented” and ultimately outstrip the 50 million casualties of the 1918 influenza epidemic," wrote Bright in his prepared testimony,“ without a science-based national response to the pandemic.”
There is much more to the current age of anxiety. New Deal economist John Kenneth Galbraith wrote a book called The Age of Uncertainty in the 1970s that attempted to explain the general anxiety brought on by post-WWII institutions that were no longer stable.
“In it we contrast the great certainties in economic thought in the last century with the great uncertainty with which problems are faced in our time,” he said. “Little of this certainty now survives. Given the dismaying complexity of the problems mankind now faces, it would surely be odd if it did.”
This anxiety has been compounded by a record income inequality, the worst since the Great Depression. A 2018 PEW Research survey showed the wage stagnation of American salaried workers over almost two generations.


Its study found that today’s real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago. And what wage gains there have been have mostly flowed to the highest-paid tier of workers, the top 10 percent of income earners.

I have frequently cited Robert Shiller, a Nobel Laureate economist who says anxiety has reached such a level that it is becoming a second pandemic, an anxiety pandemic that is contagious because “stories of fear have gone so viral that we often think of them constantly,” which could delay the recovery because of the public’s irrational responses.
“Business closures, soaring unemployment, and loss of income fuel financial anxiety, which may, in turn, deter people, desperate for work, from taking adequate precautions against the spread of the disease…But, unlike COVID-19 itself, the source of our anxiety is that we are unsure what action to take.”
And that is already happening with news pictures of crowded bars and restaurants  in states like Texas and Georgia, where they haven’t met the 14-day requirement of falling infection rates decreed by the CDC.
“Unless we get the virus under control, the real recovery economically is not going to happen,” says Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, in a recent interview. He goes on to say that “even if social distancing standards were relaxed, it wouldn’t restore the health of the economy as some protesters have implied it would.”
It is the economic health of Americans that most concerns Americans, which means remedies must be found to curb the rising anxiety, if there is to be something less than a Great Recession or Depression.

And it has to be a united focus of governing authorities on the scientific message that this pandemic is bringing; we are all in this together.

Harlan Green © 2020

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Thursday, May 14, 2020

The Times Are Changing

Financial FAQs

“The Times They Are a Changin” was Bob Dylan’s song for the 1960’s. Change was happening because of the Vietnam War and civil rights era. That is nothing like the coming changes we will see in the war against COVID-19.

In the week ending May 9, the advance figure for seasonally adjusted initial claims was 2,981,000, a decrease of 195,000 from the previous week's revised level, as the number of laid off workers has now reached 26 million, far past that of the Great Recession.

It doesn’t take rocket science to know what needs to be done to bring us out of this record economic downturn. It must be a nationally coordinated response to a worldwide pandemic, yet the White House and Republican Party is living by policies based on ignorance, with the denial of science and facts the means they use to carry out such policies. And it will not end well in the face of a virus that has no party affiliation.

The pandemic will change our way of life, just as the Great Depression and World War II changed America from an industrial and farming nation to a consumer and high tech nation.It has highlighted the major weaknesses in our broken economic and healthcare systems, and everything else government needs to do better that the private sector can’t do

Doctor Rick Bright, former head of the federal government’s vaccine testing program testified today in front of a House committee that without a science-based national response to the pandemic, 2020 will be the “darkest winter in modern history.

“The mortality of the pandemic could be “unprecedented” and ultimately outstrip the 50 million casualties of the 1918 influenza epidemic," wrote Bright in his prepared testimony, who was recently transferred from his position as Biomedical Advanced Research and Development Authority director.

What does Dr. Brightmean by a national response? The federal government has lacked a coordinated plan to first, provide enough PPE to weather not only the current outbreak, but what may occur in the fall and next year when the annual flu season hits that killed more than 70,000 last year.

But he also mentioned the fact that there was not yet a coordinated plan to produce and distribute enough vaccine “equitably and fairly” to everyone once it was developed. And this after mentioning a 12-18 month time frame to produce a viable vaccine was “highly optimistic”. It took up to 10 years to produce an effective Ebola vaccine, for instance.

So what are the changes that are needed in this new world of dangerous pandemics, in part brought on by geopolitical strive and a crowding out of natural habitats that has put us in closer contact with those creatures that carry such viruses?
“Perhaps rebalancing is a useful word,” said the NYTimes’ Roger Cohen recently. “From consumption to contemplation, from global to local, from outward to inward, from aggression to compassion, from stranger to guest, from frenzy to stillness, from carbon to green.”
What comes to mind is the social isolation requirement that will mean less crowded conditions at work and play; also the realization that we are all in this together if we want to survive, as well as save what is left of the natural planet.

I should emphasize there will be changes to the workplace as well. There has to be more reliance on the digital world that enables work at home that will also replace all those workers in warehouses, retail and transportation with robots and Artificial Intelligence.

And what if many of the 26 million have no jobs left when this economy recovers, as work becomes more dependent on computers and AI? Then jobs will have to be created elsewhere, such as in healthcare (some 300,000 contact tracers probably needed to monitor future outbreaks), environmental protection (to have clear air and water) infrastructure (e.g., to save drowning cities), education, and above all, new Research and Development to develop future ways to live in this new world.

Harlan Green © 2020

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Monday, May 11, 2020

Government Was Never the Problem

Popular Economics Weekly

President Reagan’s all-encompassing campaign slogan that “government is the problem” was never the problem. But competent governance has been a problem; in as much as incompetent leaders have been the problem dogging the overall prosperity and sustainable economic growth in our free enterprise capitalist system.

Herbert Hoover was an incompetent leader who was very image conscious (as is our current President). He helped to precipitate the Great Depression by ignoring the changing times—and a stock market crash due to record income inequality of that time. The “roaring twenties” unleashed so much irrational exuberance that the public came to believe anyone could become a Great Gatsby that lived beyond their means if they played the financial markets right.

It took one of our greatest presidents to look behind the mirrors to lift our spirits and win World War II. But then President Roosevelt had already a lifetime of experience running government as an Assistant Navy Secretary in the 1920s, then as the Governor of New York.

Hoover was a mining engineer before entering politics. President Reagan, the ‘Great Communicator’, was also image conscious as a former actor. His rise to power came from being the great communicator for Big Business that wanted to gain more power and globalize its work force; therefore Reagan reduced the power of labor unions to bargain for their rights and instituted trickle-down economics.

We know how that ended. Whole industries were deregulated in the name of free enterprise and allowed to form monopolies. Very little of our national wealth has consequently trickled down to the rest of us; except maybe for the top 10 percent income earners since the end of the Great Recession.

Corporate CEOs now earn more than 300 times the average salary of their employees. AT&T’s CEO is apparently scheduled to retire with a lifetime $274,000 per month pension.

President Reagan became a great leader for the wealth-holders in extracting more wealth for themselves, in other words, but not for those workers that actually produced it. And now we need competent governance more than ever to extract us from this oncoming Great Recession, or Depression, depending on how quickly Americans can return safely to work from the damage done by COVID-19.

Even Treasury Secretary Mnuchin predicts we could reach a Great Depression level unemployment of 25 percent, if we don’t return to work sooner. But studies show that the recession will be prolonged if we return to normal before implementing all the CDC-administrations guidelines of social isolation, testing, and contact tracing until an effective vaccine is created.
“We need to find ways of getting the people who are healthy, who are at lower risk, back to work and then providing the assistance to those who are most at risk, who are going to need to be quarantined or isolated for the foreseeable future,” Minnesota Federal Reserve Governor Kashkari said in a recent CBS Sunday interview.
But such a plan depends on leaders that can lead all Americans, the poor as well as wealthy. Whereas, Jennifer Senior New York Times Op-ed contributor has perhaps described the current administration best: “Vice President Pence may talk about a “whole-of-government approach” to the pandemic, but what we really have is a government of holes,” she said recently.

We will have to slog a long, hard road until we get to either an effective therapy or a vaccine, even with good leadership. It’s hard for me to see a quick, V-shaped recovery because of what we are facing, and now we have so much mixed-messaging coming from Washington that creates even greater uncertainty.

The only competent leadership is in states like New York, California, and Michigan—mostly blue states with Democratic governors. So I ask, why must the response to a pandemic that doesn’t recognize borders be so partisan?

Harlan Green © 2020

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Friday, May 8, 2020

The Coming Greater Depression?

Economics Weekly

Minnesota Fed Governor Neal Kashkari believes the COVID-19 pandemic doesn’t have to bring on another Great Depression. But it will still take some 18 months to recover, and only if Americans are able to cooperate in protecting themselves and each other.

There were 20.5 million jobs losses in the just released April unemployment report, and the unemployment rate rose from 3.5 percent to a rate of 14.7 percent in just one month. 
“We need to find ways of getting the people who are healthy, who are at lower risk, back to work and then providing the assistance to those who are most at risk, who are going to need to be quarantined or isolated for the foreseeable future,” Kashkari said in a recent CBS Sunday interview.
“This could be a long, hard road that we have ahead of us until we get to either an effective therapy or a vaccine. It’s hard for me to see a V-shaped recovery under that scenario.”
The letter that best describes how long the depression will last can be either a ‘V’, ‘U’, or ‘L’ shape.

Most economists say there will be at least two quarters of negative GDP growth, which means a very steep drop and sudden recovery—the ‘V’ shape. But some economists like Nouriel Roubini, the NY

University economist, see a much more prolonged recovery, the ‘L’ shape, which means no recovery for several years.

Professor Roubini raises the possibility of “mass defaults and bankruptcies. Together with soaring levels of public debt, this all but ensures a more anemic recovery than the one that followed the Great Recession a decade ago.”

Why wouldn’t he believe this, as New York has suffered the most because of its dependence on crowded subways to move its millions of workers and proximity to Europe that probably brought COVID-19 to its shores?

So New York Governor Andrew Cuomo has been exhorting New Yorkers to behave as if “It’s not about you or me, it’s about we,” to bring down their infection rate.

Job losses were heaviest at restaurants, retailers and hotels, but every major industry suffered, per the Labor Department. The health-care sector even lost 1.4 million jobs amid the worst health crisis in American history.

This is the highest rate and the largest over-the-month increase in the history of the series (seasonally adjusted data are available back to January 1948), said the BLS. The number of unemployed persons rose by 15.9 million to 23.1 million in April. The sharp increases in these measures reflect the effects of the coronavirus pandemic and efforts to contain it.

The real question is what Nobel Laureate Robert Shiller predicts will be the resultant anxiety pandemic.
“It is not good news when two pandemics are at work simultaneously. One can feed the other. Business closures, soaring unemployment, and loss of income fuel financial anxiety, which may, in turn, deter people, desperate for work, from taking adequate precautions against the spread of the disease.”
We want to also watch consumer sentiment, since there is no central message coordination from the federal government. Even the CDC, as well as the NIH and other government health agencies have been muzzled by the Trump administration in reporting consistent facts due to Trump’s fear that it hurts his reelection chances in November.

It is truly a sad spectacle to see what years of attempts to discredit scientific knowledge have done to one political party, now that it’s in the White House and faced with a virus that doesn’t differentiate between red and blue states, Democrats and Republicans.

It is an even greater tragedy to see the confusion this engenders among Americans needing to cope with this epic natural disaster that only a belief in scientific knowledge can mitigate.

Harlan Green © 2020

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