Last month’s commentary ended with the sentence, “As the consumer goes, so goes the U.S. economy.” The fiscal and monetary actions taken over the past three weeks clearly recognize this fact. There has never been zero interest rates and government stimulus so fast, so widespread, and so large as now. There has never been anything that impacted 150 countries all at once at a time of such globalization.
The March 27 passage of the third phase of the fiscal stimulus (Coronavirus Aid, Relief, and Economic Security Act—CARES Act) for $2.3 trillion (around 11% of GDP) was larger than most had expected. The scale of this fiscal stimulus and its breadth in terms of reaching a broad swath of the U.S. economy is unprecedented. In 2009, the American Recovery and Reinvestment Act was about $800 billion, or 5% of U.S. GDP and was spread over two years. Today’s stimulus is concentrated in the first year.
In addition to aggressive fiscal policy, monetary policy enacted by the Fed has also been historic. The Fed has said that they will do “whatever it takes.” The Federal funds rate was lowered by 150 basis points (bps) to 0-0.25 bps over 12 days. It took two months for a similar move in 2008. The Fed is purchasing Treasury and agency securities in the amount as needed, in addition to multiple other measures to increase liquidity in the credit markets.
Taken together, these monetary and fiscal measures are intended to prevent the financial markets from freezing up, provide liquidity for the effective functioning of the money markets, encourage and support lending by banks, stabilize the labor market, and support parts of the economy most impacted by the virus.
These are unlikely to be the last steps taken in either fiscal or monetary policy.
In the meantime, most economic data is stale except for the weekly Initial Jobless Claims report. The most recent Jobless Claims report showed that nearly 10 million (6% of the workforce) had filed for unemployment. Watch this report to see the first signs of stabilization and improvement in the labor market.
The March Employment report (data taken in the week of March 9-13) showed a reduction in payroll jobs of 701,000—the first negative reading in this report since September 2010. The unemployment rate increased to 4.4% from its multi-decade low of 3.5%. Expect the unemployment rate to reach the low to mid-teens.
Inflationary pressures are dropping rapidly as consumer spending, and general economic activity grind to a halt. Oil prices are also hitting multi-year lows as the Saudis and the Russians have flooded the markets with supply in an attempt to destabilize the U.S. oil industry. This is very deflationary.
Declining inflationary pressures will keep interest rates at historically low levels for the foreseeable future.
The S&P 500 index recorded a low on March 23 that was 35% below its all-time high recorded just five weeks earlier in mid-February. As of Friday, April 3, the index is still 26% below the February high.
Although not official, the U.S. economy is clearly in a recession due to the abrupt slowdown in economic activity associated with the virus. Before any of the economics can change, the virus must be eradicated or at least controlled. The two biggest questions confronting the economy and investors are: 1) How long will the virus persist?, and 2) How quickly will the economy and consumer spending recover once the virus has passed? As the consumer goes, so goes the U.S. economy.