Coronavirus Update: U.S.
Economy Hit Hard; IMF Forecasts Worse Downturn; Disconnect Danger Ahead?
By the Curmudgeon
Introduction:
Today
was truly momentous regarding the many coronavirus related announcements that
show the U.S. and the global economy will be hit much harder than previously
thought. The IMF once again downgraded its global growth forecast.
Latest
Coronavirus Stats:
ท There have been just under 9.5 million COVID-19
cases worldwide, with more than 483,000 deaths. More than 4.7 million people
have recovered.
ท More than 2.3 million COVID-19 cases in the U.S.,
including 121,979 deaths. The five states with the highest death tolls are New
York with 32,257; New Jersey with 13,076; Massachusetts with 7,937; Illinois
with 6,770; and Pennsylvania with 6,518.
ท 38,115 new
infections were reported by U.S. state health departments on Wednesday, June 24th
surpassing the previous single-day record of 34,203 set on April 25. Texas, Florida,
and California led the way, with all three states reporting more than 5,000 new
cases apiece.
ท Three states California, Florida, and Oklahoma
reported record highs in new single-day coronavirus cases, while
hospitalizations hit a new peak in Arizona, where intensive care units have
quickly filled.
ท At last count, there were 196,030 COVID-19 cases in
California, including 5,724 deaths. CA infections are speeding up: more than 190,000 people in CA have tested
positive for the coronavirus, with nearly 28% of the total cases reported in
the last 14 days. John Swartzberg, an infectious
disease expert at UC Berkeley, said increased testing accounts for part of it,
but that testing alone is insufficient to account for the increase in the
number of cases.
Click here to see a U.S. map
with state-by-state death tolls and coronavirus case counts.
...
Dead
people received $1.4 billion in coronavirus stimulus payments:
Let us
start out with U.S. government negligence, which seems pervasive. Nearly 1.1
million coronavirus stimulus payments totaling nearly $1.4 billion were
sent to dead people, according to a congressional independent report released Thursday June 25th. The U.S. Government Accountability
Office (GAO) said that U.S. Treasury and IRS officials did not use death
records to stop payments to deceased individuals for the first three batches of
payments because of the legal interpretation under which IRS was operating.
The
report also stated: The Internal Revenue Service (IRS) and the Treasury moved
quickly to disburse 160.4 million payments worth $269.3 billion. The agencies
faced difficulties delivering payments to some individuals, and faced
additional risks related to making improper payments to ineligible individuals,
such as decedents, and fraud. According to the Treasury Inspector General for
Tax Administration, as of April 30, 2020, almost 1.1 million payments totaling
nearly $1.4 billion had gone to decedents. GAO recommends that IRS
should consider cost-effective options for notifying ineligible recipients how
to return payments. IRS agreed.
When
the U.S. Treasury learned that payments had been made to dead people, Treasury
and the IRS determined that people are not entitled to a payment if they are
dead at the time the payment is made, and Treasury instructed the IRS to stop
issuing payments to deceased individuals, according to the GAO report. The report
says that the stimulus payments to dead people could be considered
improper payments under a 2019 law.
U.S.
Economy Hit Hard by Coronavirus:
1. US GDP fell at 5.0% rate in Q1-2020; much
worse declines expected
The
U.S. economy shrank at a 5.0% rate in the first quarter with a much worse
decline expected in the current three-month economic period, which will
show what happened when the pandemic began spread across the U.S. A revised
government estimate found that consumer spending in the first quarter was
weaker than previously thought.
The
Commerce Department reported Thursday that the decline in the gross domestic
product, the total output of goods and services, in the January-March quarter
was unchanged from the estimate made a month ago. The 5% drop was the sharpest quarterly
decline since an 8.4% fall in the fourth quarter of 2008 during the depths of
the worst financial crisis since the Great Depression.
Federal
Reserve officials and private-sector economists believe that GDP plunged around
30% from April through the June (2nd quarter). Economists surveyed
by MarketWatch expect a decline at a 29.5% annual rate. The data will be
released on July 30th.
That
would be the biggest quarterly decline on record, three times bigger than the
current record-holder, a 10% drop in the first quarter of 1958.
2.
California unemployment claims on the rise:
New
claims for unemployment benefits in California (CA) rose sharply last week
compared to the week before, the latest Department of Labor figures show.
Continued high job losses suggest the damage from the coronavirus is spreading
into more sectors, economists said.
3. CA
Governor Newsom declares budget emergency to support states virus response:
CA Gov.
Gavin Newsom on Wednesday. June 24th declared a budget emergency to
ensure the availability of funding for personal protective equipment, medical
equipment and other expenses as the state continues grappling with the
coronavirus. The proclamation clears the way for the Legislature to pass
legislation allowing the (largest populated U.S.) state to draw from the CAs
rainy day fund to help California continue to meet the COVID-19 crisis,
Newsoms office said in a statement. The proclamation is needed so California
can tap its contingency reserve funds, a key component of the state budget deal
that Newsom and legislative leaders agreed to this week.
4. Texas pauses reopening plan as coronavirus
cases surge and hospitalizations rise:
Texas
Gov. Greg Abbott announced Thursday that the state will pause any further
reopening as it continues to report record increases in Covid-19 cases and
hospitalizations.
Businesses
that were permitted to open under the previous phases can continue to operate
at the designated occupancy outlined by the Texas Department of State Health
Services, according to statement from Abbotts office.
Texas
is one of the states in the American West and South experiencing a recent surge
in Covid-19 cases. On Wednesday, the state reported more than 5,500 additional
Covid-19 cases.
5. ShadowStats John Williams latest comments on
U.S. Economy:
- U.S.
Economic Activity Was Faltering Before the Pandemic-Driven Collapse
- Pre-Pandemic
Economic Troubles Were Driven Primarily by Intensifying Federal Reserve
Policy Malfeasance
- March
2020 Economic Numbers Took the Initial Hit of the Pandemic Shutdown,
Pulling First-Quarter 2020 GDP into an Annualized 5.0% (-5.0%) Contraction
- April
2020 Saw the Worst-Ever Monthly Collapses in Industrial Production,
Nonresidential Construction, Payrolls and Retail Sales
- May
2020 Saw Dead-Cat Bounces in Monthly Production and Construction, Some
Bottom-Bouncing in Payrolls and Rebounding Retail Sales; the Latter Two
Series of Questionable Reporting Quality
- In
Its 18th Straight Month of Annual Decline, the May 2020 Cass Freight
Indexฎ Notched Lower, Closing in on Its Record Trough of the Great
Recession (2008-2009)
- Second
Year of Federal Reserve Reporting Delays Look to Exclude Long Overdue,
Pre-Pandemic Downside Revisions to Industrial Production from the July
30th Second-Quarter 2020 GDP Estimate and Annual Benchmark Revisions
- All
Considered, Initial Second-Quarter 2020 Real GDP Holds on Track for the
Deepest-Ever Annualized Quarterly Contraction, Down by Roughly 50% (-50%)
- No
amount of Government Spending or Federal Reserve accommodation and money creation will turn this
economy around, although the authorities may be well along the way of
hyper-inflating the economic collapse. Nonetheless, restoration of stable
social, economic and employment circumstances depends on the control and
containment of the massive issues arising from the handling of the Coronavirus
Pandemic shutdown of society and the economy.
- The
virus has not been broadly contained, yet. There is no vaccine, yet. High
risks to older individuals continue.
- There
have been elements of permanent destruction of or massive disruptions to
the small businesses that drive and enable so many key elements of
society.
- Protracted
Recovery Likely Will Be L-Shaped, Not V-Shaped: A full economic
recoveryregaining pre-Pandemic levels of economic activitylikely remains
some years off, in an eventually up-sloping L-shaped curve.
IMF
(yet again) Lowers Global Growth Forecast:
The
International Monetary Fund (IMF) has once again lowered its global growth
forecast for this year and next in the wake of the coronavirus pandemic. It now predicts a decline of almost 5% in
2020, substantially worse than its forecast only 10 weeks ago in April.
The
recession caused by the pandemic - globally and in many individual countries -
is likely to be deeper than the IMF previously thought.
The
IMFs gloomier outlook partly reflects the fact that data since April have
pointed to a sharper downturn than its earlier forecast envisioned. The global central bank now expects a larger
hit to consumer spending which is somewhat unusual. Consumer spending usually
takes a much smaller hit in a downturn than business investment. But this time, lockdowns and voluntary social
distancing by people who are wary of exposing themselves to infection risks
have hit demand.
The IMF
also expects people to do more "precautionary saving," which will
reduce their consumption because of the uncertain outlook ahead, especially for
jobs and business re-openings and staying open.
More
firms going out of business and people being unemployed for longer may mean
that it is harder for economic activity to bounce back as quickly as many
optimists had hoped.
There
is also a danger that, the efficiency of surviving businesses is likely to be undermined
by the steps they must take to improve safety and hygiene - to reduce the risk
of workplace transition of the coronavirus.
(Restaurants implementing social distancing protocols and extra cleaning
is the best example we can think of for such coronavirus impacted firms.)
..
The Fed
on U.S. Economic Risks:
Esther
George, President and Chief Executive Officer, Federal Reserve Bank of Kansas
City in a June 25th speech to the
Economic Club of Kansas City:
One
risk is that consumers and businesses react to the new uncertainty introduced
by the virus by pulling back on consumption and investment with the goal of
building precautionary buffers against future disruptions. While rational at
the individual level, such a pullback can hamper growth across the wider
economy.
Another
risk comes from the global economy. Foreign demand for U.S. exports had already
been weak for some time before the crisis. Now, with the virus rolling across
foreign economies at varying times and intensities, it seems unlikely that we
should expect much support from overseas as our economy picks back up.
Finally,
while fiscal policy is currently providing substantial support for growth,
there is a risk that the impetus from fiscal policy will turn negative before
the recovery has been fully realized. The coronavirus pandemic has created
serious financial consequences for state and local governments, which unlike
the federal government, must balance their budgets. In the near term,
governments are facing liquidity challenges, as many tax deadlines have been
postponed, leading to massive drops in income tax collections this spring.
Also, shelter-in-place orders have sharply reduced consumer spending, thereby
lowering sales tax collections. While state revenues are under pressure, the
demand for state services, including spending on medical supplies and temporary
health facilities, is growing.
...
Fiendbears Comments:
While
significant, all of what was reported today is just a drop in the bucket. The
real concern is that this does not seem to be going away. My conference in San
Diego is now virtual. We will be working remote until at least September.
Travel is going to remain restricted so no vacationing.
I
really do not think people realize how serious this virus is going to be once
it really gets going (i.e. 2nd wave of cases). The Fed has done a
great job propping up the stock and credit markets (see chart below), but the
economy may be in trouble for years.
...
Curmudgeons
Closing Comment:
The
disconnect between financial markets and the real economy can be illustrated by
the recent decoupling between the soaring U.S. equity markets and plunging
consumer confidence (two indicators that have historically trended together),
raising questions about the rallys sustainability if not for the boost
provided by the Fed and other central banks.
.
This
divergence increases the probability of another MAJOR correction in risk asset
prices should investors bullish and complacent attitudes change. Such a
negative wealth effect would pose a very real threat to any economic
recovery. As weve
noted in many previous Curmudgeon posts (with tables) bear equity market
rallies have occurred in the past during periods of significant economic
pressures, only to unwind quickly and sharply (like a falling knife or
waterfall decline).
Be
well, safe, and healthy. Success and
good luck. Till next time
...
The Curmudgeon
ajwdct@gmail.com
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the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been
involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative
(non-correlated) investment accounts for clients from 1992-2005.
Victor
Sperandeo is a historian, economist and financial innovator who
has re-invented himself and the companies he's owned (since
1971) to profit in the ever changing and arcane world of markets, economies and
government policies. Victor started his
Wall Street career in 1966 and began trading for a living in 1968. As President
and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's
research and development platform, which is used to create innovative solutions
for different futures markets, risk parameters and other factors.
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