The Most Hopeful Recession

Article via: CoStar Economy - Robert Calhoun


This recession is unique for a nearly uncountable number of reasons, and new ones seem to pop up all the time. We’ve got a couple of them for you, so let’s get into it.


Last week saw the release of quite a bit of sentiment data for the month of May, surveys on consumer confidence from the Conference Board as well as a collection of business confidence surveys from local Federal Reserve districts. In the current environment, the importance of tracking this kind of “soft data” has increased. These surveys usually focus on both current conditions and expectations of future conditions. Typically, those two seem to move together much more than you’d think, especially during a downturn. In a typical recession (if there is such a thing), consumers know things aren’t currently great, and they expect things to get worse. Business confidence doesn’t behave much differently; it might be a little better as a leading indicator over consumer confidence, but we won’t quibble.


The chart below shows our first interesting anomaly of the "Lockdown Recession." Here you see future expectations for consumers, manufacturers and service providers. The bars on the left show readings in October 2008, during arguably the darkest days of the Great Recession. The bars in the middle show future expectations one year later, in October 2009. The set of bars on the right show the data released last week for May 2020, the month after the U.S. economy lost more than 20 million jobs.

There is a lot to unpack here. It’s no surprise that future expectations were at rock bottom across the board in October 2008. Job losses were still mounting, banks were failing and, with an onslaught of mortgages going delinquent, no one really knew how deep it could go or how long it might last.


A year later in the fall of 2009, the manufacturing sector first saw the light at the end of the tunnel, which makes sense given its close perspective on global demand. Consumers were the slowest to recover their optimism.


The situation today could not be more different. And more puzzling. Note consumer confidence in red. Reader, consumer confidence in the future is high. In May of 2020, consumers expect conditions six months from now to improve at a similar rate as a year ago. Remember back to May 2019, if you can. What were we worried about then? Does it hold a candle to what we’re worried about today?


Why or, even better, how are consumers leading the way today?

We only had to wait for Friday’s personal income and spending report for April to find out. Continuing our 2020 theme of broken charts, take a gander at the one below which shows the monthly change in personal income and personal spending:

We stopped at 2000, but you could go back to when the data starts in 1959. You’re not going to find a single month decline in spending or rise in income like this. This was a strange month. It makes sense that we would see spending fall like this. But what is happening with incomes?


The chart below breaks out the components of personal income, and we start to see what’s going on.

That big, yellow bar is government transfers, meaning money from the government. And, as it turns out, all Coronavirus Aid, Relief, and Economic Security Act stimulus checks are included in April income, even if many didn’t receive their checks during the month.


That’s weird, but don’t let that dilute the point: Government stimulus is covering household income losses, at least temporarily.


And what are households doing with those checks? The savings rate chart below should give you a hint.

Throw another broken chart on the pile. We’ve never seen a savings rate like this before. Ever.


Now the consumer expectations graph starts to make sense. Most of those who lost jobs in April considered their loss temporary. And the government is sending them checks.

The tricky part is, this won’t last. The checks were only sent out once, and the expanded unemployment benefits ⁠— which made up one-third of all unemployment insurance payments in April ⁠— expire on July 31, unless extended.


There is another deadline that is fast approaching. Firms receiving Paycheck Protection Program loans have to rehire employees within eight weeks of receiving funds. For the earliest recipients, that’s June 30. If those enhanced unemployment benefits aren’t renewed, the economy is really counting on those workers being rehired, and soon.


Last week’s jobless claims report appeared to be showing some progress in that direction. Continuing claims, people who have remained unemployed after their initial filing, fell for the first time during the crisis, to 21 million as of May 16 compared to 25 million the week ended May 9. This is partially due to data quirks, with California having a biweekly pay period distorting when checks are sent, and Florida being… well, Florida. Washington saw an unexpectedly large dip as well.


We wanted to start tracking rehiring at the state level, so to give us a rough proxy we made the chart below. The dark bars labeled “rehired” measure the fall in continuing claims as a percentage of the labor force (the thinking being, if people are coming off the continuing claims roles, they are getting rehired. … Hey, we said the proxy was rough!). And the yellow bars show new initial claims filings. Remember, we already highlighted the issues in the data with Florida, Washington and California. … We don’t think all those people are getting rehired.

This improvement, combined with a drop in those searching how to file for unemployment, means we are on the road to labor market recovery. Next week’s employment report for May will likely show the unemployment rate in the 20-30% range, but that could be the high-water mark for this downturn.


As the chart above shows, that improvement won’t likely be consistent across states. We’ll keep tracking it this way in the weeks and months to come. We just want to get this framework set up now, and we’ll let those few states with wonky data work out their problems over time.


Those data issues; they stick in our craw a bit. We’ve found some great sources of alternative data, so let’s use one of those now. Looking at data from the timesheet software provider Homebase and the Harvard-based economic research and analytics shop Opportunity Insights, we can look at employment trends on a daily basis. This data is pulled mostly from "restaurant, food & beverage, retail and services and are largely individual owned/operator managed businesses,” so a good view into those most impacted. Similar to other work we’ve done on density and mobility, we see the same here, as states with super dense metropolitan areas such as New York and Washington, D.C., and states such as Massachusetts, California and Illinois all see hiring down by more than 50% from January. The more open territories of the Midwest are faring best as a region, with South Dakota somehow seeing net hiring. The same could be said for the less dense Southern and Western states, though with much more variation within those regions. The Northeast remains in the worst shape.


On a whole, hiring has improved by 21% off the COVID-19 lows, but is still down 40% from January. Progress is progress. As Congress slowly debates next steps for extending stimulus, the range of outcomes is huge. Consumers expect things to get better; don’t let them down.


The Week Ahead …

This week should see another historic data release, with May employment data out on Friday. As mentioned above, expectations are for another significant drop in payrolls, to the tune of 7.5 million or so. Unemployment is forecast to rise to 20%. Most interesting will be the breakdown of job loss across industries, likely even more spread out after the initial furlough of food and hotel workers.


The Fed enters its quiet week ahead of its June 9-10 meeting. The fifth meeting of 2020 will be focused on details around the Fed's new lending programs, with the Main Street Lending Program slated to start this week, possibly even by the time this note comes out. The Fed's economic projections will return, says Vice Chairman Richard Clarida, but the policy rate forecasts will not.


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