Economic Commentary

We now have endured five months of battling the COVID-19 virus and our experience has revealed much about our country and our collective as well as divided political wills. What is our present condition as we approach the sixth month of our battle to defeat the virus? Our economic condition is perhaps the easiest to define at this point. The New York Federal Reserve’s weekly economic index bottomed in April at -11.89, revealing that our economy was functioning nearly 12 percentage points lower than zero percent GDP growth, and nearly 14% below the GDP growth rate in April 2019. The reduction in growth rate was far in excess of the average recession, and similar to that experienced in the depression of 1929 – 1935. The index measures real time data surrounding production, labor and consumer activity. The July 28 WEI was posted at -7.35, which is a -9.35% growth rate decline year over year and a 35% decline quarter over quarter. The decline from the posting in June is due to an increase in initial and continuing unemployment claims, as well as a decline in retail sales. In essence, the trend is continuing to reflect a deep recessionary economic cycle.

Republicans and Democrats in the legislative bodies are, at the time of this writing, negotiating the next round of stimulus to add to the over ten trillion dollars of stimulus already authorized in prior bills. Points of contention are based in ideology as well as the political self-interests of both parties. During the recovery from the 2008 recession, Republican’s criticized Democrats for using stimulus bills to favor their political and economic agendas, such as wind and solar energy. The shoe is on the other foot and Democrats are now pushing back at Republican efforts to tie stimulus to required school openings and unemployment limits capped at 70% of previously earned wages. While both parties are far apart in both dollar amount and allocation restrictions, it is an election year and both have a need to be seen as responsive to the need, which is substantial. The best opportunity for economic recovery is an employed and confident consumer. Currently 11.1%, or nearly twelve million people, of our workforce are unemployed and facing a substantial reduction in unemployment benefits. We should expect that the reduction in benefits, if enacted, would impact retail sales, rent and mortgage payments negatively. The Republican side of the aisle has consistently represented that jobs are available and would be sought after if the unemployment benefit was lower. Democrats point to small business surveys by the national Chamber of Commerce that indicate 45% of all small businesses feel the probability of reopening their business is very low; the implication is that for many, their return to work is hampered by permanent — not temporary — business closure. For this population, it will be new job creation driven by organic economic growth that will provide future employment opportunities.

Prior to the COVID-19 created economic crisis, the American workforce numbered approximately 156 million. Of that number, 27.5%, or about 42.5 million people, earned less than $15 per hour or $600 per week. The Administration, Treasury Department and Congress knew the importance of providing liquidity and stimulus to employers, employees and consumers to keep the economy functioning. They settled on an average wage of Americans of approximately $30,000 per year. The benefits would be administered by the individual states and the Treasury Department would fund the states’ burden as long as the program was in place. The advantages were simplicity and speed while simultaneously not placing strain on individual state budgets. The payroll protection plan (PPP) was designed to help small businesses keep employees on the payroll even in the face of no revenue. The plan assumed the need would be short term and that most businesses would return to a semblance of normal commerce within weeks, not several months. Reality has demonstrated a much longer duration of business interruption, and in many cases the PPP program caused many companies to get to failure quickly, thereby laying off sooner rather than later.

The challenge going forward is to create organic economic growth by fueling the capacity of consumers to buy goods and services, make their rent or mortgage payments as well as pay consumer debt, i.e. credit card debt. This task has always been a challenge for those making under $15 per hour and will be virtually impossible if the benefit is scaled to 70% of their former wage. For most of the 42.5 million workers earning less than $15 per hour, their new benefit will be closer to $9 per hour or $360 per week. Adding to the challenge of scaling the benefit to prior wage is that state workforce departments will be tasked with the administration of the benefit. All states have furloughed workers and will be challenged to add complexity and income verification screens to the administration of the benefit, further delaying getting the benefit into the hands of the consumer.

All economic indicators suggest we are still in decline and decreasing programs to provide stabilization and stimulus only adds to the problem. As the economy begins to recover through organic growth, reducing artificial stimulus funded by the Treasury will make sense. We aren’t there yet.

As this newsletter arrives in your inbox, the Presidential Election will be only 90 days away. For some, that will seem an eternity and for others it will arrive too quickly. History suggests that most Presidents have won second terms. Of the 44 Presidents having served prior to Donald Trump, only eleven did not win a second term. Popular culture assumes that people vote with their pocketbook and if the economy is in good shape, unemployment is low and consumers feel good about the future, sitting Presidents generally earn a second term. History doesn’t really validate that popular culture assumption, and only two former Presidents, Hoover and Carter, lost substantially due to economic reasons. The remaining nine lost due to scandal, inter party political discord or domestic and geopolitical discontent.

Most political pundits who guide and counsel candidates for the highest office in our country settle the narrative with an important question: “Are you better off today than you were four years ago?” The obvious implication of the question is that voters will return the sitting President to office if they can answer the question in the affirmative. Clearly there is more to the equation than one question, yet in the main voters’ decisions are more binary than not. Which candidate has your confidence given the issues that most concern you? Sitting Presidents have an advantage when the issues voters have are few and particularly void of passion. Geopolitical strife, war, economic decline or domestic unrest can either be a burden or advantage to a sitting President. Rather than the difficulty of the issues being the determining factor of voter preference, it is almost always determined by how confident the voter is in their candidate of choice to lead the country to a solution that is in line with their desires.

The election before us will not be void of hard issues or passion. Leadership and confidence will be essential determinants in voter turnout and therefore voter preference. More will be revealed in the coming days and weeks. By next month, former Vice President Biden will select his running mate and party conventions and nominating formalities will have taken place. I often refer to the election year as the silly season where truth is the victim. I am going to refrain from that this time. While truth will be the victim in political ads, this election is far from silly and no matter what side of the electorate you find yourself in, it will be important.