“We need more direct fiscal policy and support to try to limit the possibilities of those very dire scenarios”, Cleveland Fed chief Loretta Mester said Tuesday evening, while speaking to reporters on a conference call following a virtual discussion hosted by the CFA Society.
By “very dire scenarios”, Mester was referring to cascading bankruptcies and knock-on effects for banking stability.
In her prepared remarks, Mester said unemployment will likely be 20% or above prior to any recovery. Her expectation for the economy in the second quarter is for a contraction of as much as 40% on an annualized basis, which puts her worst-case outcome generally in line with some of the more dour forecasts.
Mester’s remarks underscore the risk of lasting, structural damage to the economy in the event lockdowns persist long enough to transform a liquidity issue into a solvency crisis, as Raphael Bostic put it last month.
That message – that the US is at risk of witnessing a wave of business failures – permeated Fed messaging on Monday and Tuesday, even as officials warned that reopening the economy too quickly represents an even greater risk.
“We cannot hit the pause button for very long in major economies around the world [and] certainly not in the US”, Jim Bullard remarked. “You will get too many business failures and really do lasting damage”.
I’ve updated a visual I frequently use to help capture the scope of the malaise for America’s small businesses. After ticking up over the past two weeks, it now provides a glimpse into what the “new normal” might look like for local establishments.
As a reminder, the data I tap into for this comes from Homebase, a scheduling and time tracking tool used by more than 100,000 local businesses covering 1 million hourly employees.
According to the latest numbers, hours worked are still down between 45% and 50% from January benchmarks, after falling as much as 75% on April 12. The data compares a given day to the median for that day of the week for the period January 4 to January 31.
Measures of the number of businesses open and the number of employees working are virtually identical in terms of the trend and trajectory. The number of locations open was off by 36% as of Monday, from a low of -66% in mid-April.
The latest read on small business optimism from NFIB on Tuesday showed another steep decline. “The impact from this pandemic, including government stay-at-home orders and mandated non-essential business closures has had a devastating impact on the small business economy”, NFIB chief economist William Dunkelberg lamented.
“Owners are starting to benefit from the PPP and EIDL small business loan programs as they try to reopen and keep employees on staff [but] small business owners need more flexibility in using the PPP loans to support business operations and liability protection so that all these efforts to support small businesses are not ultimately lost in costly litigation”, Dunkelberg added.
He also emphasized that until consumers are comfortable, reopening businesses will be a frustrating exercise in futility. “Consumers must feel ‘safe’ before they come back out with their wallets. The sooner that happens the faster the economy will recover”.
Other real-time measures of economic activity show similar trends to the Homebase figures. Updating the latest data from TSA shows total traveler throughput rising above 215,000 on Monday. Air passengers are now down “just” 91% from the the equivalent day in 2019.
It’s hard to look at that chart and envision a scenario where things are back to “normal” anytime soon. Warren Buffett certainly didn’t come across as optimistic on the industry’s prospects during his somewhat surreal virtual event earlier this month.
Perhaps the most interesting data (at least in terms of the extent to which it captures trends across locales virtually instantaneously) comes from Apple.
The following visual shows you requests for directions in Apple Maps by country and by type of transportation. This data was made publicly available by the company. Maps doesn’t associate data with Apple IDs, and the company doesn’t keep a history of where users have been. These mobility reports are being made available for a limited time during the pandemic, Apple says.
There are also data for the number of people walking, and it’s available by city.
If you can get past the somewhat unnerving prospect of your footsteps being represented in the chart (assuming you’ve been asking your iPhone for directions over the past several months), this information is very useful when it comes to monitoring activity now that stay-at-home orders are being lifted.
Once again, it’s the same picture. A plunge followed by a gradual creep higher over the last two weeks.
The question we need to ask ourselves is whether any of these trends will ever return to normal. Of course, the year-over-year comparisons will eventually normalize once 2020 becomes the comp, but that begs the question. From here on out, all trends in economic activity will need to be benchmarked against 2019 in order to get a real sense of whether things have, or haven’t, returned to any semblance of normality.
In a note taking a closer look at the three types of possible recoveries (V, U and W), BofA’s Ethan Harris and Michelle Meyer write that while there are decent arguments for a dramatic turnaround, “the main problem is that the number of cases remains high as the economy re-opens and strong testing and tracking systems still seem months away”.
“If hot spots keep popping up it will be an ongoing reminder to people to avoid reengaging, regardless of the official rules”, Harris and Meyer go on to say. “Thus even as states start to reopen, surveys say the majority of Americans think it is still too soon and will be reluctant to re-engage”.