The Public Health Crisis Needs to be Solved Before the Economic Crisis

The accelerating increase in new Covid-19 cases is slowing the pace of the U.S. economy’s recovery from the pandemic. According to Bloomberg economist, Eliza Winger, “Most high-frequency indicators have shown signs of moderation. Consumers’ income and spending benefited from fiscal support and reopening efforts, both under renewed strains. The uncertainty was likely behind the latest deterioration in consumer sentiment, a key to the economic outlook.”

So, where do we stand?

• Recent data shows that credit card spending has stalled.
• OpenTable is showing a slowdown in restaurant reservations.
• Initial jobless claims declined by the most in a month to 1.31 million in the week ended July 4, but they’re still double the highest level registered during the last recession. Furthermore, as states walk back their openings, these numbers are expected to increase.
• A surge of layoffs are coming as company announce large layoffs to deal with COVID, e.g. American Airlines – 25,000; United Airlines – 36,000; Walgreens – 4,000;  Macy’s – 3,900; AT&T – 3,500; Hilton Hotels – 2,200; Chevron – 5,000; Boeing – 7,000; Uber – 3,700; Virgin Atlantic – 3,100; Wells Fargo – haven’t said but I am sure will exceed 20,000. This short list accounts for over 110,000, so the numbers will be large.
• While many mortgage holders are refinancing to take advantage of the low rates, one in 10 households with a mortgage failed to make their last payment, and 16% of respondents in a U.S. Census survey said they fear they can’t cover the next one.
• Federal Reserve Bank of Dallas President Robert Kaplan said that rising hospitalizations and death rates are having a “chilling effect on economic growth.”
• With the eviction moratorium ending, the eviction of 20MM renters this month is possible. However, this has several ramifications, where will these people live and who will replace them as so many people would rent can’t make payments. Thus landlords will experience pain.
• The $600 additional unemployment payments are ending.
• The PPP program is about to end and those that took PPP funds have mostly spent them.
• M&A volume is falling.

Thus, my take is that this is far from over. While I would argue that we are not in a second wave of the virus as we never exited the first, we are in an inverse square root recovery, but we could quickly move into a “W” recovery.

The key will be what will Congress do. The parties are wide apart at the moment, and to add to the problems, the Administration is pushing for a payroll tax cut (dubious effect), refusal to fund state COVID testing and tracking, and blocking billions of dollars that would go toward bolstering the Centers for Disease Control and Prevention, the Pentagon and the State Department to combat the pandemic. Somehow they haven’t yet accepted that this is a public health crisis and until that is solved, the economic crisis cannot be dealt with.

So, keep cash on hand and watch receivables and all leading indicators. It is going to be a rough second half, folks!

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