Cabin Fever Hits Markets – Long Economic Winter Ahead
Growing up in Minnesota, I am very familiar with the cabin fever that can result from long winters and being stuck at home for months on end.
Before long you’re climbing the walls with boredom and dreaming of the places you will go and the things you will do when the weather breaks.
The U.S. equity market rally at this point is feeling a lot like that these days.
The S&P 500 has jumped 26.8% in less than a month. Reports that the drug remdesivir could be speeding the recoveries of severe patients and official discussions of how we will reopen the economy again have gotten equity investors jazzed about better times just around the corner.
The drop in Treasury bond yields over the same period suggests bond investors have a very different view of our economic future – as do most economists. The reality is there is still a long economic winter ahead of us even if parts of our economy can start to reopen over the next couple of months.
Like a Category 5 hurricane that has hit the entire world. The ferocity, speed, and extent of the economic and financial damage of this pandemic is unparalleled in our lifetimes. Pandemic shocks also come in waves much like a hurricane’s unrelenting bands of rainfall and wind. There are times during a hurricane when winds and rains subside only to pick back up again. We may be living through one of those lulls with this virus right now.
Only when we discover a workable and proven vaccine and can administer it at a global scale will we be able to call an end to this health crisis and resulting economic and financial storm. It is wishful thinking that the damage will all just melt away like a bad dream once we are given the all-clear to go back to work.
The reality is that our forecasts for U.S. and global economic growth continue to be slashed as our models fail to keep up with the carnage the pandemic is reaping on the global economy. The annual IMF/World Bank meetings were held virtually this week and we largely agree with the sobering assessments offered by their economists. The global economy will see its biggest decline in economic activity since the Great Depression this year. Few people alive today have seen anything like it.
We see the global economy contracting 3.2% this year and further mark down our forecasts for economic growth for all major economic regions of the world, Europe, Japan, United States, and China. The bad news is we still might not be done slashing these forecasts.
Our baseline assumption is that more and more economies will begin to reopen in the second half of this year. If the virus re-intensifies and widespread shutdowns are re-imposed, global economic outcomes could still be far more dire and a hoped for economic rebound in 2021 may never materialize.
The most visible sign of the carnage the virus is reaping on the U.S. economy are the weekly jobless claim figures. The U.S. economy is hemorrhaging jobs at a pace and scale never before recorded. It compares to a natural disaster on a national scale. With 22 million initial jobless claims in the U.S. over the past month, the U.S. unemployment rate is probably already over 17.0%. With another 4.4 million initial claims forecasted for next week, the U.S. unemployment rate will likely be well over 19.0%.
Before this recession ends, we think the U.S. unemployment rate will hit 23.0% with approximately 30 million jobs lost. These are Great Depression levels of labor market dislocation in a month or two that took three years to unfold during the Great Depression.
Bottom-line, it will probably take years for the unemployment rate to return to more normal levels and for real GDP in this country to reclaim its pre-virus peak, even if economic activity returns in the second half of this year. It’s a long economic winter ahead.
To find out more, check out this week’s U.S. Outlook report.