July 10, 2020
There is no question that the virus is spreading more rapidly as the U.S. economy continues to re-open. But we believe that the press is overstating the problem. Meanwhile, every economic indicator released in the past two months has been far higher than had been expected. Nevertheless, economists remain convinced that slower growth lies ahead. Despite all this negativism from the press and from economists the stock market marches higher. However, investors worry about the re-imposition of a lockdown similar to what happened in March and April. In our opinion, that is not going to happen for a variety of reasons.
With respect to the virus, we admit that we have no particular expertise. But we do follow numbers and a couple of things seem relatively clear. Every day the press breathlessly reports the number of new cases which now exceed 50,000 per day which is far worse than it was in mid-April when the virus was at its worst. That is a scary-looking chart.
But to a large extent that is happening because many more people are being tested on a daily basis. Today, roughly 650,000 people are being tested daily. That compares to about 150,000 per day in mid-April. If we are testing 500,000 more people today than we were a couple of months ago, of course far more people will test positively! What did you expect? The fact that the press focuses exclusively on the rapidly increasing number of new cases being reported daily is misleading.
The way that the figures should be reported is the percentage of the tests done each day that are positive. As shown below, that figure has been rising. In mid-April about 20% of the test results came back positive, in large part because the only people being tested were ones who were already showing symptoms. As testing has increased, that percentage dipped to about 4.5% by the end of May. It has since climbed to about 8.5%. As the economy re-opens the virus will spread. That should be expected. But is it spreading out of control? We do not think so. While the situation has worsened, it is not nearly as disquieting as the mainstream media would lead us to believe by focusing solely on the number of new positive cases being reported each day. The press chooses sensationalism rather than what we would consider to be a fair assessment of the situation.
The other thing we have noticed is that the press focuses exclusively on those states where the virus is spreading most rapidly – California, Texas, Florida, and Arizona – and ignore the rest of the country. And they love juicy descriptions. Favorite words and phrases are — for the first time, a record number, the most in x days, relentless, ravaging, spiraling out of control. That language is, in our opinion, inflammatory, widespread, biased, and needlessly undermines consumer and business confidence.
Is the situation as bleak as the press would lead us to believe? Absolutely not. With regard to the economic situation, most economists initially expected the recession to last eight months which is about average. Once we learned about the extent of the fiscal stimulus, we thought it might last four months. How long did it last? Two months. Absolutely amazing!
The rebound is evident in every single economic indicator we have received for May and June – payroll employment, retail sales, home sales, the purchasing managers index for both the manufacturing and non-manufacturing sectors. And the July data continue to climb. Initial unemployment claims today, for example, are already 200 thousand below where they were in mid-June.
The number of people receiving unemployment benefits is already 1.3 million less than in mid-June. Each week an additional 1.5 million people file for unemployment benefits, but the number of people receiving unemployment benefits declines by 0.5 million, The only logical conclusion is that the economy was strong enough to produce not only 1.5 million jobs to absorb the new entrants onto the unemployment rolls, but an additional 0.5 million workers to reduce the number of people receiving benefits. That is the description of a rapidly improving labor market.
For what it is worth, we expect an increase in payroll employment for July of 4.0 million workers and we expect the unemployment rate to decline from 11.1% in June to 9.4% in July. While obviously still high relative to the 3.5% level prior to the recession, it is falling far more quickly than anyone expected.
Should we worry about the re-imposition of a lockdown later this year? Absolutely not. First of all, as we explain above, we do not believe the virus is spreading nearly as rapidly as we are being led to believe by the mainstream media. Second, it is not clear that the March/April lockdown did a lot to contain the virus. It may have helped somewhat, but that point is debatable. It seems to us that it probably bought us a bit of time, but as soon as the economy re-opened the virus began to spread — which is exactly what it would have done in the absence of the lockdown. Third, a renewed lockdown at this stage would significantly worsen the economic situation. Many businesses, small ones in particular, have hung on given hope that the economy would rebound. A renewed lockdown would force many to shut their doors for good and result in permanent job losses. Finally, there is an election coming on November 3. Trump wants to get re-elected. If he reimposes a stay-at-home order the economy plunges back into recession. He is not going to allow that to happen.
Our sense is that in the months ahead consumers will find that if they follow the rules – wear a mask, wash their hands frequently, and practice social-distancing – they can safely to go restaurants, grocery stores, retail shops, fly, and go to hotels without undue danger. If that is true, the economy will continue to chug along at a moderate pace in the fourth quarter of this year and beyond.
Try to ignore the negative hype.