Friday, August 7, 2020

Is a 50% recovery in 3 months just chump change?

I'm hearing some analysts say the July jobs report was disappointing because it shows the economy still has a huge number of people out of work. That's true: the unemployment rate has only come down from a high of 14.7% in April to 10.2% in July, and that's still way higher than February's low of 3.5%. To bolster their case, they also note that seasonal adjustment factors overstated the job gains in July. That's true too: the non-seasonally-adjusted employment growth figure rose by only 591K in July vs. the seasonally adjusted headline figure of 1763K.

So: is this glass really half empty? Let me explain why I see it as half full.

Chart #1

Chart #1 is my long-time preferred measure of the health of the jobs market: the level of private sector jobs on a seasonally-adjusted basis (the private sector is where all the economy's dynamism comes from). From a high of 130 million in February, jobs fell to a low of 109 million in April. They have since increased to 118, and that represents a recovery of 9 million jobs, or 43% of the total loss. To be fair, you could say that since the economy has recovered only 43% of the jobs it lost, the economic glass is half empty.

Chart #2

However: Chart #2 shows the non-seasonally-adjusted version of Chart #1. Here we see that jobs fell from a high of 128 million in February to a low of 108 million in July, and they now stand at 119 million. That's a recovery of 11 million jobs, or 55% of the total loss. So by looking at the raw data, one could argue that the glass is more than half full. To be fair, let's average the 43% of jobs recovered using seasonally-adjusted data with the 53% of jobs recovered using non-seasonally-adjusted data and say that in the past three months the economy has recovered about half the jobs lost in the Covid shutdown catastrophe.

Is this just chump change? Just how lousy is a 50% recovery of the jobs lost during a deep and painful recession in just 3 months? Consider the recession of 2008-2009, which you can see in Chart #1. The total job loss from the 116 million high in December '07 to the 107 million low in February '10 was 9 million. Coming out of that Great Recession, it took the economy about two years (until early 2010) to recover half of the jobs lost. Today's economy has bounced back very quickly by historical standards. You might even call it a "V" shaped recovery, no?

I think it's very impressive, especially considering the huge headwind that Congress' $600/week bonus unemployment payout created. I pointed this out in early May, by the way. That bonus of $600/week effectively gave a raise to about two thirds of those collecting unemployment—they made more by being unemployed than they made while working. In effect, the government was giving millions of workers a raise and at the same time telling them to take a 3-month paid vacation, because the bonus $600/week would extend through August 1st. So despite very generous unemployment benefits, roughly half of the unemployed have returned to work! I won't be surprised to see stronger job gains in the months to come, thanks to the loss of $600/week that has now kicked in.

Unless, of course, Nancy Pelosi has her way and extends the $600/week bonus through the end of the year. If Trump has his way instead, he will direct the IRS to stop collecting payroll taxes through the end of the year (he would then promise to sign legislation next year to forgive these taxes). This would be very bullish, because it would not only increase the after-tax wages received by all those who work, it would also reduce the after-tax cost to employers of every worker. Employers would have a significant new incentive to re-hire or add to their workforce, and employees would have a new incentive to find a job and/or go back to work.

Pelosi's plan would be a disincentive to growth, Trump's plan (championed by my long-time friend Steve Moore at the Committee to Unleash Prosperity) would instead incentivize growth.

There is reason to be optimistic.

Now for some quick updates to charts I'm watching on a daily basis:

Chart #3

As Chart #3 shows, the stock market has recovered almost all of its Covid/shutdown losses, and investors' fear levels have fallen significantly. The market is looking across the valley of despair in the belief that a recovery is underway and we will eventually return to some semblance of normality within the foreseeable future.

Chart #4

Chart #4 compares the price of gold to the price of 5-yr TIPS (using the inverse of their real yield as a proxy for their price). Both of these utterly different assets are in a sense safe-havens. Gold protects against the unknown and is considered by many to be a hedge against inflation. TIPS are default-free and promise investors a government-guaranteed inflation hedge (their effective yield is the sum of actual inflation plus their real yield). Both work as a safe port in a storm. That both are soaring in price is a sign that investors these days are willing to pay a steep price for protection. Risk aversion, in other words, is alive and well.

Chart #5

Chart #5 shows the nominal and real yields on 5-yr government bonds (red and blue), and the difference between the two (green), which is the market's implied inflation expectation over the next 5 years. Note that pretty much all of the rise in expected inflation this year is due to a decline in the real yield on TIPS. Investors are paying up for inflation protection, as Chart #4 also shows, but expected inflation is still expected to be relatively tame (currently just 1.5% per year) from a historical perspective. If anything stands out on this chart, it is the unusually low level of real yields. Real yields are heavily influenced by current and expected real growth rates in the economy, as shown in Chart #6, so this is a sign that the market is still quite concerned about the long-term outlook for economic recovery.

Chart #6

Chart #7

As Chart #7 shows, airline passenger traffic was roughly flat for most of July, following a fairly dramatic recovery in April, May, and June. The latest data hint at a resumption of growth. To be fair, this chart does not support the view that the economy is still in a v-shaped recovery mode.

But it's not unreasonable to think that the so-called "second wave" of Covid new cases and new deaths, shown above, which sparked renewed attempts by a number of states to roll back their re-openings, was the reason economic growth appears to have stalled (as Chart #7 suggests) in the past month. If that's true, then we can take heart from the fact that new cases appear to have subsided of late (which further suggests that new deaths are likely to soon peak). This reduces the need for continued restraints on state economies.

In my view it's terribly unfortunate—and rather scary from a libertarian viewpoint)—that state and local authorities have resorted to draconian measures (e.g., shutting down churches, gyms, and many restaurants) to hobble their economies in a vain attempt to "beat" the virus. I have not been able to find anyone who can marshall compelling evidence that lockdowns improve Covid outcomes. Most statistical analyses I have seen find no relation between the degree of economic lockdown and the number of deaths from Covid.

In our understandable and collective rush to save lives and deny the virus, we are tragically ignoring a fundamental truth of economics. Thomas Sowell, arguably our greatest living economist, put it simply: “There are no solutions, there are only tradeoffs.” Viruses can’t be “beat,” they can only be slowed down or minimized. Locking down an economy today may postpone deaths but it can’t eradicate the virus. Most importantly, economic lockdowns incur terrible costs, as we now know, that are measured in trillions of dollars of lost income, tens of millions of lost jobs, hundreds of thousands of bankrupt businesses, and countless lives lost to other diseases and suicides.

Friday, July 31, 2020

Highly recommended reading

This is an overwhelming summary of all the facts, figures and charts that are needed to put the Covid-19 crisis into perspective. I urge everyone to read through this and consider the facts and the statistics. The risk of Covid to the world has been blown all out of proportion, and the lockdowns have been totally unnecessary and egregiously expensive. Once again, I reiterate what I said many months ago:

The shutdown of the US economy will prove to be the most expensive self-inflicted injury in the history of mankind.™

We didn't need to do this. It has been a terrible mistake.

And if there is a single chart which makes the point, it would be this chart, which shows that the number of Covid-19 deaths in Sweden, one of the few countries which took no extraordinary measures to lockdown its economy, has fallen to almost zero:

Bonus and related quotation:

"Keeping colleges closed this fall is far more likely to stop the spread of communism than it is to stop the spread of Covid-19." HT: Wesley Mark

Tuesday, July 7, 2020

Lots more green shoots

It's been several weeks since my last post, but no, I haven't been sick with Covid nor has anyone in my extended family. I've just been enjoying the market's buoyancy while also tracking the economy's recovery. The economy seems to be doing pretty well, but it's still got to climb out of a very deep hole before we'll all breathe easy. Meanwhile, the market is doing a decent job of looking across the valley of despair, as it often does, and ignoring all the hype surrounding a supposed second Covid wave. BLM protests looked quite threatening for awhile, but are now fizzling out—and leaving a legacy of lawlessness and chaos which I hope will sharpen minds come election time.

New Covid cases are surging in some areas, but to date there is almost no evidence of an increase in new deaths. In fact, the Covid outlook continues to improve. Dr. John Ioannidis (an early sage who correctly cautioned against Covid shutdown) has reviewed some 50 international studies and argues that some 150 million to 300 million people around the world have already had the virus, far more than the 10 million recorded cases. “For people younger than 45, the infection fatality rate is almost 0%. For 45 to 70, it is probably about 0.05%-0.3%. For those above 70, it escalates substantially.”

Believe it or not, "Despite the recent spike in COVID-19 cases, deaths have continued to decline and may soon reach a level where the coronavirus will no longer qualify as an epidemic under CDC guidelines." (source)

Meanwhile, vaccine solutions are on the horizon, and a recent hydroxychloroquine study showed a 50% reduction in hospital mortality rates. Remember, you first heard about HCQ here in late March.
Chart #1

As Chart #1 shows, there has been a definite increase in the number of new cases in the U.S. This has prompted the MSM to warn of a deadly second wave. But this is no reason to panic, and no reason to worry about another shutdown. It's very important to remember that this virus is not going to disappear anytime soon. So far, recorded cases total less than 1% of the population (though according to Ioannidis it could be much more—but still a relatively small number). Before this is all over, at least half the population could end up infected, but the good news is that at least 99% or more will survive. Much of the recent increase in cases comes from younger people, many of whom were asymptomatic but were required, for various reasons, to be tested. And of course there has been a tremendous increase in the number of tests administered, so that alone could account for much of the rise. The nationwide wave of BLM protests and riots, most of which occurred between May 26th and June 6th, surely contributed as well to the increased number of cases.

Chart #2

As Chart #2 shows, the number of new daily deaths in the U.S. has been declining for more than two months, and there is as yet no evidence that the recent increase in cases has led to an increase in deaths. Deaths were expected to decline simply due to the warmer and sunnier weather, which typically results in fewer deaths from flu. It may also be possible that the virus has evolved into a less lethal version (which in turn enables it to more widely propagate, since its hosts live longer). Moreover, people have changed their habits—being more cautious now. HCQ may also be a factor in reducing deaths. Whatever the case, fewer deaths alongside rising cases cannot be a bad thing at all.

Chart #3

Chart #3 shows a huge increase in the ISM Service Sector Business Activity Index for the month of June. This signifies a significant improvement in what is the lion's share of our economy. It doesn't get more V-shaped than this!

Chart #4

The overall ISM service sector index, shown in Chart #4, increased by almost as much as the business activity index. And it's encouraging that conditions in the Eurozone service sector have also improved dramatically.

Chart #5

As Chart #5 shows, airline passenger traffic at US airports has risen almost seven-fold since the April low. Although the rate of growth has slowed of late, passenger traffic nevertheless increased over 20% in the past two weeks.

Chart #6

Global equity markets are recovering nicely. As Chart #6 shows, Chinese equities have surged of late, and the yuan has strengthened. Remember: what's good for China is good for the world.

Chart #7

As Chart #7 shows, Eurozone equities are still struggling, having severely underperformed US equities in recent years. Europe is still suffering from "Eurosclerosis."

Chart #8

Chart #8 continues to be most intriguing. That the prices of gold and 5-yr TIPS—two utterly distinct assets—should track each other so well and for so long is amazing. The only way to understand this is to think of each asset as a "safe haven" asset. Investors these days are willing to pay a steep price for the perceived safety of both gold and inflation-protected bonds. That must mean that the world is still in the grips of fear, uncertainty and doubt (FUD). 

Chart #9

Chart #9 updates my long-time favorite chart. Here we see that with fear declining, equity prices are slowly returning to where they were before the virus hit. The recent spike in the Vix index coincided with a brief "second-wave" scare that is now being digested.

Recommended reading: Arnold Kling, Economics After the Virus

Kling presents a model—a way of thinking—to better understand what is unique about the recent plunge in economic activity. In his model "sustainable patterns of specialization and trade" were disrupted by the Covid virus and the subsequent shutdown of the economy. New patterns now need to be found. This will take time, and the traditional policy tools of monetary and fiscal stimulus are of little help. The government should thus focus its efforts on increasing the incentives to work (e.g., a payroll tax holiday), rather than handing out subsidies in an attempt to stimulate demand. Trying to stimulate demand only increases the risk of inflation, by creating shortages of essential and new products and services.

I would argue that one thing he misses is the demand for money and money equivalents, which in normal times is quite low. In a crisis, demand for money goes way up and the Fed has to accommodate this, as I have argued here for many years. But at some point the Fed has to reverse, and that is difficult (the Fed needs to get the timing, quantity, and level of rates just right to avoid problems). Other than that minor quibble, I think he gives us some valuable insights into the problems the economy and policymakers face today.

UPDATE (7/8/20): Check out this chart of Sweden's daily new deaths. Despite eschewing egregious restrictions, the country seems to be acquiring enough herd immunity to virtually stop the virus in its tracks. This is the Holy Grail of the fight against Covid:

Here's the chart of daily new deaths: