In a Nutshell: Cracks in the Economy

At the Fed’s Federal Open Market Committee meeting held recently, committee members announced that they would leave key interest rates and quantitative easing unchanged. Fed Chairman Jerome Powell later said that the economic outlook remained “highly uncertain” and would depend on the path of the coronavirus.

Many of my colleagues on Wall Street are getting nervous now that the 2020 federal budget deficit is forecasted to sur-pass $2 trillion, surpassing 10 percent of GDP.  The Fed may not have enough tools to control Treasury yields. While the Fed can control short-term rates, it is allowing the Treasury yield curve to tilt higher.

The Fed may also soon start to curtail its quantitative easing on long-term Treasury bonds. The 10-year Treasury this past week already rose to yield 1.18 percent, up .08 basis points for the week!

Looking at GDP

Speaking of GDP growth, the Commerce Department announced that its preliminary estimate for recent GDP growth was an annual rate of 4 percent, well below the Atlanta Fed’s latest estimate of 7.2 percent. Driven down by the second quarter’s national lockdowns to fight China’s COVID-19 spread, 2020’s 12-month GDP contracted 3.5 percent, the largest annual GDP contraction since 1946.  

Looking ahead, the International Monetary Fund (IMF) forecasts that the U.S. GDP will expand 5.1 percent during 2021, while private economists are forecasting 4.3 percent growth.  The pace of future GDP growth will be impacted significantly by Covid-19 restrictions.  So, assuming California and other states soon reopen their economies, GDP growth should improve.

There’s no question the economy faltered late last year. COVID case rates soared, hospitals filled up, and fatalities once again climbed. A number of states and cities tightened economic restrictions. Retail sales fell in all three months of the 4th quarter, and weekly jobless claims rose from 711,000 in early November to as high as 927,000 in early January. There’s compelling evidence the economy not only stalled, but that future growth was negatively impacted.

Last month some weekly economic statistics —jobless claims, for instance — began to improve, but they improved more slowly than they deteriorated in the prior two months. Meanwhile, other weekly statistics were still losing steam.  The NY Fed’s Weekly Economic Index, which peaked in the last week of December at negative 0.6% year-on-year, fell in three of the past five weeks and currently stands at -2.27%, its lowest in seven weeks.

Disappointing Jobs Numbers

Elevated weekly unemployment claims translated into a disappointing monthly jobs report, with just 49,000 jobs added in January.  159,000 jobs were lost during November and December. The official unemployment rate dropped recently from 6.7 percent to 6.3 percent, but two-thirds of that drop reflected 406,000 discouraged workers who stopped looking for work. If they were still among those counted as unemployed, the rate would be 6.6 percent. Last year’s net job losses totaled 9.3 million.

Unemployment stood at 10.1 million last month, not counting the 4 million who stopped looking for work in the past year. In that light, the 49,000 jobs added last month seems particularly small. There still is an enormous amount of work to do to get back to full employment. The recent recovery in weekly added jobs statistics was slower than the deterioration in December!

And, because U.S. economic growth fell during the second half of the fourth quarter and recovered at a slow rate in the first quarter so far, it’s entirely possible GDP could fall in the first quarter of 2021, as well.