A week ago, President-elect Biden hurt his foot while playing with Major, one of his rather rambunctious dogs. Following a CT scan of his injury, it was determined that he had suffered a hairline fracture and his doctor suggested an orthopedic boot. While it is, no doubt, an awkward piece of footwear, the course of treatment was not controversial. If, however, his doctor had told him to just walk it off and instead prescribed caffeine and steroids, his competence would have been called into question. Mr. Biden was clearly injured and in need of support, rather than tired and in need of stimulus.
The same could be said of the American economy today, in the midst of a worsening pandemic and in the wake of a disappointing jobs report. We expect that Congress will pass additional coronavirus relief before adjourning for the year and that vaccines will finally rid us of this pandemic in 2021. However, investors should recognize that deficits run during the pandemic must inevitably lead to fiscal restraint later in the decade and long-term returns will, to some extent, depend on the precision and efficiency with which the federal government attempts to aid the economy today.
The pandemic numbers remain absolutely grim with confirmed cases now averaging almost 200,000 per day, fatalities averaging over 2,000 per day and hospitalizations running at above 100,000. Moreover, according to Johns Hopkins, the seven-day moving average of the national test-positivity rate is a very high 10.4%, suggesting no significant decline in any of these numbers in the days ahead. Vaccine news is positive and it appears likely that widespread inoculation over the spring and summer months will finally end the pandemic. However, this will not prevent massive fatalities over the winter, underscoring the importance of the universal adoption of public health protocols such as mask-wearing and social distancing.
As last Friday’s jobs report made crystal clear, the widening pandemic is preventing a full recovery in the economy. Most businesses have adapted well to a Covid economy, some by adopting protocols to keep their employees and customers safe and some by adjusting to a stay-at-home work environment. However, many companies just can’t do this, including wide swaths of the leisure, entertainment, travel and restaurant businesses and a host of medical and personal services.
The U.S. economy lost an astonishing 22.2 million payroll jobs between February and April of this year, almost equaling the 22.8 million jobs added in the prior decade. It has since recovered 12.3 million or 56% of these lost jobs. However, the pace of recovery has slowed dramatically, with just 245,000 positions added in November, following a gain of 610,000 in October. Importantly, much of the remaining job loss is in sectors that are most affected by the pandemic and we don’t expect to see any further significant recovery in these areas until next spring.
It should also be emphasized that, while the unemployment rate fell to 6.7% in November, this greatly overstates the extent of the recovery in the labor market. In the previous 11 recessions since World War II, the labor force was always higher nine months after the start of the recession than at its inception. In sharp contrast, the U.S. labor force is now more than 4 million people smaller than in February, indicating that many people are not even looking for work because their industry is essentially shut down. Since these people are not searching for jobs, they are not counted as unemployed. If they were, the measured unemployment rate would be over 9%. In addition, hundreds of thousands of restaurants and other small businesses have been shuttered, with many families rapidly losing equity built up over generations.
Very belatedly, it looks likely that Congress will pass some further coronavirus relief. Importantly, both Speaker Pelosi and Majority Leader McConnell have agreed to try to attach relief legislation to the omnibus bill necessary to keep the government funded past this Friday. Of course, even this deadline could slip for a few days, if negotiators agree to pass a short-term, stopgap funding bill.
While details are scarce, some of the relief provisions may mirror suggestions from a proposal made by a small bi-partisan group of senators which would further extend funding for unemployment benefits and add $300 per week to each check, provide additional PPP loans to small businesses, provide extra funds to state and local governments to help with vaccine distribution and testing and extend moratoriums on evictions.
However, these measures would still fall far short of the support the economy needs until the end of the pandemic.
• First, quite apart from the cost of battling the pandemic, the recession has slashed state and local government revenues, contributing to the loss of 1.3 million government jobs since February. Additional federal funds to state and local governments could help reverse this trend.