William D. Johnston


Economic Commentary

Awareness is sometimes a self-inflicted burden. Those of us that research information for a living are bombarded with data that, while informative, can lead to anxiety and increased senses of urgency. The greater experience that you have researching information, the more likely you will discover that the majority of people are living their lives in one of two camps. Either they specifically select sources of information that validate their already held beliefs, or they believe they are just fine without discovering more. In the main, I think most understand that the economy has taken a huge hit, millions of people are unemployed, millions have become infected and by the 4th of July nearly 150,000 Americans will have died from complications of the pandemic virus COVID-19. The question that most people who are aware of our current economic condition have is “where specifically are we? Where do we need to go and how will we get there?”

I have previously mentioned the data measurement tool created by the New York Federal Reserve Bank, the weekly economic index (WEI). The index is comprised of a series of real-time economic indicators reflecting data on production, labor and consumer behavior. The New York Fed chose those indicators as a real time proxy of GDP and, therefore, a tangible way of comparing our current condition to where our economy was twelve months prior to the current moment in time. They have been collecting this data set for a few years, but only recently have begun to publish it in a weekly updated fashion. I find it a very useful tool to answer the question of where we are currently. This week’s published WEI was -8.2, implying that our current GDP is -8.2 and approximately 11.2 below where we were at the same time period last year. For perspective, in March of 2020 the WEI index bottomed at -11.8 and has improved weekly for eleven consecutive weeks.

Relevance is important, during the “Great Recession of 2007–2009” GDP fell -4.3% from its high in 2007 to its trough in 2009 over a 14 month cycle. Our current recession began in March of 2020 and the drop to -11.8% of GDP occurred over a matter of weeks, not months. Nick Juhle and his research team have done a wonderful job of providing weekly updates for clients of Greenleaf Trust, which are rich with data points on employment, consumer confidence, consumer activity, equity and fixed income market conditions and global as well as domestic COVID 19 Data. The current decline, by any other comparison, has been severe and immediate. Currently 13.3% of our labor force is without a job and the U-6 unemployment rate is nearly 19%. The answer to the question of where are we is clear.

Every American wants a return to where we were. Those that complained in 2019 that three percent GDP growth was anemic would love to get back to that condition, so the really important next question is “How do we get back there?” I have previously mentioned that those hoping for a sharp and quick return will be disappointed. There are real tangible impediments to doing so, and we want to call attention to those challenges.

Anyone who reads this column regularly knows that I described the continuing recovery from the last recession through 2019 as being dependent upon an employed consumer who was confident, spending and saving. Twelve years of increasing employment, three years (2016-2019) of increasing wages combined with low inflation resulted in incremental but consistent GDP growth. Today, it would be accurate to say the consumer is shaken by historic levels of job loss, digging into savings, and their confidence is at a twelve-year low and thus consumer spending is minimal. What will change this condition? As with any recession, job gains are essential, so let us zero in on the challenges to that essential need.

During the Great Recession as business investment disappeared, financial markets imploded, the liquidity crisis expanded and unemployment grew, the Federal Reserve and Treasury Department spent nearly $2.35 trillion in a variety of stimulus programs. On June 10th of this year McKinsey & Co. published a report identifying nearly $10.2 trillion in current stimulus packages already authorized by legislative action with more certain to come. In both cases, government was and is taking on the role of temporarily replacing employment, consumer spending and business investment. The estimate on current stimulus programs does not account for deferred tax deadlines for both consumers and businesses. No stimulus plan is ever perfect, and both administrations will be criticized for those imperfections; however, the essential ingredients of any plan are urgency, economic stabilization, consumer activity even in the face of unemployment, housing stabilization and demand growth that will fuel near-term job growth.

Of the nearly 155 million Americans in the workforce prior to March 1st of 2020, nearly 55 million were employed by “small businesses.” The bandwidth of employees in this classification is pretty wide, and could range between 1–250 employees or 1–1500 employees depending upon industry classification. It is important to know, however, that these classifications represent over 99% of our private enterprise workforce, and are critical to the future growth in employment and therefore growth in GDP.

While the attention has been focused on SBA stimulus packages aimed at the 55 million employed in small businesses, the yet to be talked about employment challenge is in the federal, state, municipal, K–higher education and nonprofit workforce. None of the current stimulus packages have been targeted to the huge state and municipal deficits that have been created, which have a direct impact upon public education and university budgets.

We are financing the current stimulus needs through the printing press of the Federal Reserve, and every other country during this pandemic has been doing it as well. We will continue to do this until the pandemic subsides and economic activity returns to a level of sustainability where organic growth, consumer activity and business investment can replace government intervention. Make no mistake, however, about the price being paid for the cost of changing the public health and economic condition we are in. This fifth pandemic in the last century that we are currently in will be the most costly ever and it will not be the last. While doing all that we can do to return our public health and our economy to an acceptable level of normalcy, we will miss the most important question if we don’t ask how we can and must be better and more ready the next time.

The price we are paying for not being ready is obviously in the human tragedy of death. We are also paying the price of deficit explosion that must in the end be reconciled and paid for. Can we kick what will certainly be a 14 trillion dollar deficit expansion can down the road for the current pandemic? For those my age, sure. For our children? Maybe. This pandemic will cost us a seven-fold increase in deficit growth over our last severe recession. Can we afford, as the richest nation in the world, to survive another seven-fold increase in deficit growth as a result of another pandemic? I think not. Every question we ask, every protocol we develop, every research dollar we spend on treatments and vaccines and every collaborative relationship we develop with others preparing for the next occurrence, will be worth that effort and cost. We won’t get there blaming one another, politicizing the science or public health agencies. Disease isn’t assigned by political party membership and deficit dollar liability is assigned to all taxpayers and citizens, both current and future. We have work to do, and not doing it is not an option.

COVID-19 Updates

As of August 2

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