After studying the economic data over the last few weeks, unprecedented is a word that often comes to mind. The most striking example of the unprecedented economic impacts from COVID-19 appears in the employment data. In a span of merely six weeks, we have seen over thirty million people in the United States file for unemployment. That total equates to roughly one in five American workers—a staggering total. As we can see from the chart below (courtesy of the Wall Street Journal), the claims are slowing but we saw a little less than two million in the last week (early June) and will likely see many millions more before returning to more normal levels.
To put these job losses in context, let’s compare the job losses to the “Great Recession.” If we look at chart below showing “Continuing Jobless Claims” (i.e., folks that haven’t landed a job and continue to file state unemployment claims), we can see that we’re already at levels about three times higher than what we saw following 2008 and it’s still projected to get worse. So, in summary, you’d have to return to our worst economic collapse ever, the Great Depression, to find numbers like this.
On the bright side, unlike the Great Depression, there is reason to believe that many of these job losses will be reversed quickly as businesses are hoping to quickly ramp back up following the pandemic. Many “unemployed” workers are, in fact, “furloughed” (i.e., still employed, often with benefits, but not being paid) and are fully expecting to return to their prior employer in the coming months. Social distancing measures have been effective in slowing the growth of the virus and there is reason for optimism that more businesses will begin to open—albeit with some revised standard operating procedures. It’s also been impressive to see American ingenuity at work as many businesses have reinvented themselves quickly during the crisis (e.g., restaurants ramping up take-out operations and “gig economy” delivery apps like Instacart and DoorDash becoming household names). We’ve also been impressed with the speed at which schools have moved to virtual learning platforms and healthcare has adopted telemedicine. It’s clear that we will emerge from this pandemic in much better shape to combat future outbreaks with less disruption.
It is a little scary, however, that the American economy, like many in the developed world, has steadily become more and more service-oriented. The U.S. Bureau of Labor Statistics, for example, indicates that we now have about ten million workers each in education and health care, over seven million in personal care and over thirteen million in food preparation and serving related. This shift is normal and consistent with other developed nations. Productivity gains simply allow us to meet basic needs with fewer workers. For example, the New York Times reports that over 30% of U.S. workers were in farming/agricultural in 1920 (the first year of the Census) compared to less than 3% today. It’s also noteworthy that less than 15% of our workforce are in manufacturing. While we believe this shift is an encouraging advancement (e.g., basic needs are able to be met by fewer workers leading to lower costs and higher standards of living), it does show the fragility of our current service-based economy. The reality is that many service-related jobs are considered “non-essential” and inevitably more vulnerable to short-term impairment or permanent elimination.
The additional danger of the current situation, is that it can become a negative cycle that feeds on itself. The American economy is driven first and foremost by consumer spending. Americans that don’t have jobs simply don’t have the discretionary income to spend. Moreover, even employed Americans become cautious as uncertainty spreads. We are seeing this caution manifest immediately as a massive spike in the “savings rate” (i.e., the percentage of disposable income that is set aside for savings). The savings rate nearly doubled in the last month to over twelve and one-half percent – the highest rate seen in thirty years. A high savings rate can be scary for businesses that become reluctant to invest and/or hire thereby perpetuating the cycle.
As we mentioned in our quarterly update, the unprecedented challenges presented by COVID-19 have been met by massive stimulus by central banks around the world. The news has been well-received by the stock and bond markets which have rapidly recovered much of the drawdown. At this point, it’s impossible to know how this situation will play out from here as many companies have “pulled their guidance” for the remainder of the year. In other words, it is hard for them to predict short-term future earnings. If consumers and businesses continue to gain confidence that the worst is behind us, we may see a rapid rise of employment and a return to pre-pandemic consumer spending levels. The outlook may be even brighter on the business spending side where investment may exceed pre-pandemic levels given the return to a zero-interest-rate environment. However, if uncertainty remains and caution persists, we could see many jobs losses become permanent. A resurgence in positive COVID-19 cases or a delay in the development of a vaccine would be potentially devastating—an outcome that would lead to a much more prolonged downturn and likely further stimulus. In either scenario, in our view, it’s likely that more short-term volatility will persist as markets rapidly try to digest each new wave of data. Of course, we plan to continue to monitor the situation and will adjust plans accordingly.