We have to admit that we are going through unprecedented and extraordinary times. Unfortunately in a negative way. And this take will be not substantially different, but yet with the hope for the better. It will contain very important projections and data statistics for the citizens of the largest economy in the world, the United States. At this point, I would like to recall that out of $86 trillion of global GDP, the US contribution is as much as $20.49 trillion, or 23.8%, according to the World Bank data. Also, as of January, the American stock market has accounted for 54.5% of global stock market capitalization. Therefore, this is not surprising why stocks indices around the world are highly correlated with those in the US, maybe except China. Below you will read about the current expectations regarding the labor market as well as the entire economy performance in the Land of Liberty.

LABOR MARKET AND ECONOMIC (NEGATIVE) GROWTH

Traditionally, let's look first at the number of coronavirus cases. Total confirmed is now more than 350,000 with 15,328 deaths and 100,182 recoveries. In the US, the number has breached 35,000, the third-highest in the world, with 471 deaths. This pace of growth is shocking, 7 days ago it has been 10 times lower. As you can see the amount of virus infections is getting closer to Italy. In effect, New York, New Jersey, Connecticut, Illinois, and California enforced lockdowns in their states in order to contain the spread. As a result of these actions, roughly 80 million Americans (one in four) have been forced to close their premises and stay at homes. As you probably guessed, it must have massive consequences for the US economy and its labor market.

Currently, the entire population of the United States is 331 million people with almost 159 million employed and 4,6 million having at least two jobs. To illustrate the scale of damage, let's bring an example of the restaurant industry. There are 1 million restaurants in the US employing around 15.6 million people which is roughly 10% of the entire workforce. The majority of these premises had to be shut down basically overnight and we don't know precisely for how long it will last. Moreover, even if some of them are still open, they have no customers as restaurants have recorded 100% decrease in table reservations after just two weeks. Therefore, it must have a huge impact on the employment numbers, it is simple math. Add to that many other industries such as tourism, oil, automakers, retail, theaters, live sports, hotels, airlines, cruises, and shipping and we can see that almost entire economy has stopped. By the way, naming all of them gives a devastating feeling. Let's look then at possible numbers.

It has to be emphasized that projecting the impact is extremely difficult. However, some largest financial institutions have appropriate resources to attempt that assessment. In the beginning, it is worth to look at the data which will be released at the earliest (in a matter of days) in order to facilitate judgment of the overall picture. Below you can see the chart of the Initial Jobless Claims in the US. This is a weekly data reported by the US Department of Labor that counts people filing to receive unemployment insurance benefits for the first time. It is considered as a very good leading indicator for the monthly or quarterly unemployment rate data.


Over the last 50 years, the number of newly unemployed people has never breached 700,000 and now the biggest banks are projecting from 2.25 million to 4 million in just one week! That's very dramatic news and sadly it is just the beginning.

When we read about the unemployment rate projections in the second quarter of this year, they oscillate between 8-12% which is a really huge number considering that the current rate is at a 3.5% level (a 50-year low). The Federal Reserve Bank of St. Louis President James Bullard went one step further and said that the rate may even reach 30%. To give you a perspective, I compiled the data for over the last 90 years and included his forecast in the chart.


Should that materializes, it will be an even higher rate than during the great depression in the 1930s...

This is something that truly has never been seen before.

Mentioning all those developments it is worth digging further and check the expected overall US economic performance. As the entire country is rapidly shutting down the data must not be promising. No delusions. Forecasts for the first quarter range between 0% to -6% negative GDP growth. However, reading about the second quarter estimations we can have a feeling like we are reading about the Third World Country. Just see the chart below.


Almost all of these forecasts are lower than the highest annual GDP drop in history, or during the earlier mentioned Great Depression. Of course, there is still some time till the second quarter ends and this data may change in either way but current projections look very depressing. Is there any solution to this? Yes. Only one - brace.

SUMMARY

It is awfully likely that we are awaiting the most adverse economic event of our lives. The sudden economic stops have led to a massive shock in the largest economy on the globe. There is still a lot of uncertainty about what's gonna happen next with the virus, whether there will be a second wave or this respiratory illness will go away very soon. Let's hope, however, that massively implemented social distancing will highly limit the spreading and eventually stop the virus.

One thing, however, is certain, the post-virus world will be entirely different. If one thinks that we will quickly come back to the norm economically (V-shaped recovery) and socially he simply underestimates the inevitable long-lasting consequences. This unprecedented event will change people's spending habits, decrease financial risk-taking and cause more de-globalization which may lead to higher costs of production and labor, so the higher prices (inflation). The biggest problem is, however, that our authorities in the form of central banks and governments are stubbornly trying to find a cure using the same tools and actions but with more intensity. Unfortunately, there is no cure around, yet. As I recently noted:

"The biggest hoax of this era (magnified during this crisis) is that because central banks' and governments' actions such as massive money printing and stimulus, negative and or low rates didn't work they have to go for Modern Monetary Theory and Helicopter money - which simply means more money printing.
This is completely WRONG. Lunacy cannot be cured by more lunacy."

I will leave you with the quote which probably most of the market participants already know, but I think that it's a great time to recall it:

“Insanity is doing the same thing over and over again and expecting different results.” Albert Einstein

We are at the cusp of something new, and I personally believe, that after some significant harm, it will be something better.

Take care,
Seb


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