Reclaiming Economic Output. The National Bureau of Economic Research (NBER) views real GDP as the single best measure of aggregate economic activity. Based on recent data, BofA calculated the global economy has been pushed back in time, with real GDP falling back to 2014 levels in the US, and worse for other economies:
Bill McBride from Calculated risk noted “current estimates for Q3 real GDP growth are in the 15% to 25% range” (annualized). Based on his calculations, 15% growth in Q3 would leave the US about 7.5% below prior real GDP peak and 25% growth would put the US economy 5.5% below the prior peak. As a point of reference, the depth of the GFC saw real GDP drop 4% below the prior peak in 2007 and it took about 18 months for real GDP to recover from that level.
No Deal on additional fiscal relief last Friday led to executive orders by the President over the weekend. Jeff Stein of the Washington Post recapped these actions: 1) Evictions: No eviction moratorium, asks HUD to “consider” if evictions should stop. 2) Unemployment: Uses $44B from FEMA to cover $300/week for ~5 more weeks (+$100 from states). 3) Taxes: Option to defer payroll tax payment, but without new law they will still be due. According to Bloomberg, US states are currently projected to face budget shortfalls of about $555B through 2022, making their portion of unemployment payments more difficult. Mitch McConnell said Thursday he is hopeful for a bipartisan agreement some time in the coming weeks. With the DNC the week of 8/17, the RNC the week of 8/24 and Labor Day 9/7, it may be mid-September before any compromise can be passed.
Surging in Sync. Commodities—basic inputs used in the production process—may be bought and sold by investors or transacted directly between suppliers and producers. Commodities traded by investors or financial intermediaries are more likely to be swayed by speculative behavior, while price signals from non-exchange traded commodities may provide a “surer steer” on the underlying direction of industrial growth. Currently, both exchange and non-exchange traded commodities are “surging in sync,” according toresearch conducted by ECRI. This is a positive trend to monitor, as continued growth in ECRI’s Industrial Price Index (IPI) growth will likely indicate continued healing in industrial activity. US Industrial Production decreased -8.2% YoY through month-end July, according to data releasedFriday.
Presumed Market Floor? Economists remain pessimistic on the spread of Covid and its impact on the economy, while bullish and bearish fintwitters are positive to neutral, according to recent data analyzed by Arbor Data Science.
Economists are more likely to focus on the true economic impact of the loss in CARES support; particularly the expiring $600/week additional Federal Pandemic Unemployment Compensation (FPUC) and the closing of the Paycheck Protection Program (PPP). Market participants are likely conflating the economy with the stock market and are increasingly confident in the Fed’s ability to backstop financial markets (referred to as the Greenspan/Fed put). House Speaker Nancy Pelosi said July 21 on CNN and again Friday on MSNBC that the stock market is doing well because of the Fed’s actions. It’s important to note that when everyone perceives market risk is not present, you become most vulnerable to the opposite being true. The Fed can provide liquidity, but it cannot guarantee solvency.
Household Financial Stress Building. Despite data that supports real personal income increased during the initial impact from Covid, households were starting to fall behind on mortgage payments through May, according to recent data from CoreLogic. “Absent further government programs and support, CoreLogic forecasts the U.S. serious delinquency rate to quadruple by the end of 2021, pushing 3 million homeowners into serious delinquency.”
