In a Nutshell by Ken Herman

A question that many on Wall Street are asking is why a full recovery from the Covid-19 created recession could take five years, even if everything goes right.  While that is not likely assuming Trump is reelected in November, it could take even longer if less business-friendly candidates take control of the USA. Other concerns (about recovery time) include months of lost income that will leave people in debt, and businesses with eroded balance sheets or even bankruptcy, resulting in permanent job losses. But, most recent economic news has been positive, indicating an ongoing recovery. Nevertheless, recent state reversals in movement toward normalcy carry a sense of foreboding about America’s ongoing recovery timing.

Now that a smooth, instant recovery appears to be out of reach, and with some federal aid dollars running out, is a new round of layoffs coming?  As a dozen or so Southern and Western states cope with what is, for most, an acceleration in their first significant wave of Covid-19 infections, a second wave of layoffs could be coming. Workers caught up in new lockdowns — restaurants, bars, and retailers — as well as employees of bigger companies with an international presence may be at risk. Also, how many people work for employers who retained employees believing that the reopening, once begun, would be a smooth transition toward full employment in a matter of months?

The economic “dashboard,” as former Fed Chair Janet Yellen used to call the array of economic statistics, is looking more positive every week. However, the current Fed Chairman does not foresee a V-shaped economic recovery – which some recent economic data indicated.  Instead, Fed Chairman Jerome Powell’s testimony before Congress last week appears to suggest more economic uncertainty.

The Fed recently released its latest Federal Open Market Committee minutes, which confirmed that they will be “highly accommodative,” fearing a possible longer recession. They also held an extensive discussion about capping bond yields.  Coincidentally, the 3, 5, and 7-year Treasury yields all hit record lows early last week, so the Fed is clearly continuing to minimize interest rates to stimulate economic growth.  Naturally, these ultra-low interest rates also help stimulate the stock market, especially for high dividend stocks which continue to attract the capital that previously may have been invested in the bond market.

Combined, state and local governments are one of the biggest employers in the country. Many states are faced with “agonizing” budget decisions, as widespread (even temporary) job losses and closed businesses have reduced revenue from sales and income taxes. Many state fiscal years start on July 1, meaning they are probably cutting spending now. Budgets for schools, universities and other services are likely being slashed. Many government jobs have been eliminated since March, and there likely will be many more. Many states are constitutionally mandated to balance their budgets. Because many states followed the Federal government’s lead and extended tax filing deadlines from April to July, those states expect a surge in revenue this month, but they don’t know how much.  

New York City may not have been the epicenter of what New York Magazine called the worst and deadliest outbreak of COVID in the world. With all of the bad decisions made by the Mayor and Governor, resulting in a death rate from Covid-19 exceeding 8% in New York, only New Jersey and Connecticut death rates are comparable in this country. However, hot spots in Iran and Brazil were worse. Nevertheless, 28 states in the USA now have Covid-19 death rates below 2.8%., so over 8% is extreme.

The deaths and ongoing damage in New York City is already evident in Bloomberg commercial real estate data. There are US cities with a higher percentage of loans in trouble (than NY), but the $20.5 bn in loans on Bloomberg’s watchlist is two-and-a-half times the $8.6 bn watch listed in Los Angeles, which is the second highest in dollar terms. Extended lockdowns and rioting severely damage all impacted economies. Not surprisingly, given the number of people not paying rent in New York, the CRE watchlist (for NY) is dominated by multifamily housing.

Good people in New York need our prayers! Our entire Country could use divine intervention as anti-American forces have joined with the Wuhan coronavirus to damage America.