In life before the pandemic, (and it seems like years ago), Sari and I would often drive from our home in Massachusetts to New York for the weekend. The destination was always fun—seeing the kids, exploring new restaurants, catching a Broadway show and sometimes running a road race the next morning to burn off the extra calories. But we had to get there first.
Setting out on a Saturday morning, we would buzz into Connecticut at a fast clip, only slowing occasionally out of respect for the state troopers trying to make their monthly quota. Inevitably, however, the traffic would start to back up around Bridgeport. Sometimes it would get so bad that the nav system would divert us onto the back roads and from there we would snake our way far more slowly into the city.
Following a shocking collapse between February and April, economic data have, so far, staged a very swift recovery, with Thursday’s June jobs report showing a record 4.8 million monthly gain in non-farm payrolls following a 2.7 million rise in May. However, this still represents just 34% of the 22.1 million jobs lost in the prior two months. Moreover, the real limits to economic activity in a pandemic, combined with a rising number of new infections and timing effects of provisions in CARE’s Act all threaten to divert the recovery to the back roads, leading to slower progress from here.
Why The Recovery Should Slow
Recent high-frequency economic data continued to show gradual increases in the numbers flying, staying in hotels and eating out at restaurants. Monthly auto sales rose in June relative to May as did construction employment. However, all of these activities remain well below pre-pandemic levels and a recent surge in new cases could slow further gains from here. While social distancing reduced confirmed cases from over 30,000 per day in mid-April to just 20,000 by late May, this number has since vaulted higher and is now running at close 50,000.
One small consolation in this is that, even allowing for the natural lag between infections and fatalities, it appears that mortality rates are falling. This may largely reflect the younger ages of those now getting infected but could also be the result of better drugs and protocols for those admitted to the hospitals.
Provisions in the CARES act could also impact the pace of recovery over the next few months. In particular, two rounds of the Paycheck Protection Program saw $518 billion in forgivable loans approved by the Small Business Administration by May 1. However, a key provision of these loans is that the money had to be spent within eight weeks of the loan origination date and 75% of it had to be spent on payrolls. While these rules were subsequently relaxed in the PPP Flexibility Act, signed into law on June 5, it seems likely that most of this money was indeed spent on payrolls in May and June and that it would have run out at the end of June. If this is the case, then the employment report for July, which covers the week of July 12–July 18, could see substantial layoffs of workers who were kept on payrolls or rehired under the PPP program. In addition, in July, it will still be the case that many if not most of these laid-off workers will be eligible for an additional $600 per week in unemployment benefits, giving them an incentive not to return to work.
Investors should closely watch unemployment claims data over the next few weeks to assess the impact of fading PPP effects and continued enhanced unemployment benefits on payroll gains and the unemployment rate in July.
The Risk Of A Relapse
Beyond July, a new stimulus package could impact the pace of recovery.
In terms of timing, Congress returns from its July break on July 20 but then goes into recess between August 10 and September 7, so if a bill is passed it would most likely be in early August. However, negotiations on this bill will likely be tougher than previous packages, partly because of the proximity of the November elections and partly due to genuine ideological differences between the parties. In particular, Democrats want a further extension to enhanced unemployment benefits and more aid to state and local governments while Republicans are intent on providing incentives for rehiring workers and protecting businesses from Covid-related lawsuits. Both sides also appear to be in favor of further “one-time” checks to families. If a bill is passed that contain all of these elements, but which somewhat reduces the generosity of unemployment benefits, then increasing economic activity can probably proceed, even as the pandemic, by some measures, worsens. However, even in this case, bankruptcies and layoffs will likely continue as more and more businesses find it difficult to stay afloat with the much lower revenues and higher costs of a pandemic economy.
Moreover, if Congress fails to pass further stimulus, then the economic rebound could slow more sharply in the months ahead, with the unemployment rate potentially rising back into the teens. While such a relapse is possible, it probably wouldn’t be enough to turn real GDP growth negative in the next few quarters. Moreover, entering 2021, medical solutions, rather than medical problems, should take top billing in driving economic activity.