People working from home don’t purchase fancy clothes, new cars, hotel rooms, airline tickets, or even very much gasoline, However, they are spending money at grocery stores and purchases on line for an endless supply of munchies (and also on streaming television). Maybe that’s a bit of an exaggeration, but it perfectly describes the pattern of pricing in the April CPI. Goods and services you don’t need (while being locked down, as well as social distancing) fell in price (men’s suits and outerwear, for instance, fell 11.3%) while cable TV services rose 0.6% and food rose 1.4%, (the most in years).
The CPI report (last week) was remarkable. The CPI and core inflation have never fallen so much in a month. Year-on-year core inflation tumbled as much in two months as did the sharpest six-month drop in 2009. Eleven years ago, it took 18 months of recession before inflation broke lower. This time around, it took just a few weeks. The collapse of prices globally in March and April reflected the widespread lockdowns from COVID-19. From here, inflation will return when economies reopen enough, or enough producers go out of business, or some combination of the two, to restore the balance of supply and demand.
Jay Powell told CBS 60 Minutes (May 17) pretty much the same thing he told Wall Street analysts on May 15. That TV appearance was more of an effort to broaden the Fed’s reach than to add to its past message. The two takeaways the press focused on were: (1) No negative rates, because “there are other tools we can use first”, and (2) Congress should do more. Mr. Powell added “I don’t give them advice on particular policies. But I would say, if I may, that policies that help businesses avoid avoidable insolvencies, and that do the same for individuals – keep workers in their homes, keep them paying their bills, keep family’s solvent – so that we’re in a position to have a strong recovery” deserve our focus.
This unnatural, almost worldwide partial lockdown is deflationary. Reopening the USA (very likely to continue unevenly as states certainly do not seem to agree on what is best for their citizens) will be gradual. There may be some COVID-19 setbacks. But, the level of current resistance to opening up many states for business and personal freedoms suggests that inflation could be in abeyance for some time.
The Senate Banking Committee hearing (May 19) with Jay Powell and Steve Mnuchin was notable in part for a remarkable display of ugly politics by assorted senators of both parties. If Washington is getting nastier again, maybe it’s because this CCP disease is in retreat. Anyway, it was hard not to chuckle when Secretary Mnuchin warmly thanked Senators Crapo and Brown before reading his opening remarks. This came just seconds after Senator Brown accused him of sacrificing lives for another thousand points on the Dow. One of the nice things about testifying remotely, apparently, is it’s easier to tune out crazy opening remarks.
The most important takeaway (from an economic standpoint) is that most senators seem genuinely concerned that their proposed Main Street loan program should help as many businesses as possible. Mnuchin and Powell were pressed to make the program broad, appealing, and accessible. Mnuchin fended off an effort from Massachusetts Senator Warren to require companies participating in the “slush fund” (her words for the program she voted for) to guarantee not to cut any workers. Mnuchin explained that the Senators (from both parties who drew up the legislation) made it clear that their intent was to insure job retention.
A recent House bill could cost $3 trillion on top of the $3 trillion already spent on COVID-19 related nationwide relief. Nancy’s bill includes One Trillion Dollars for aid to states. President Trump called that bill dead on arrival.
You will hear a lot of media reports about how the upcoming economic statistics will be “the worst since the Great Depression” or “the lowest on record”. However, while that may all be numerically true, the Great Depression was a 12-year nightmare in which the jobless rate was over 14% for a decade, reaching 25% in 1933. From 1931 to 1940, the jobless rate never dipped below 14.3% for any one full year. It was over 20% for four straight years, 1932-35. That won’t be the case this time around – not even for one full year!
According to data just put out by Ned Davis Research, the recent (first quarter) stock market decline was the largest in history. Interestingly, the 33.7% surge from the low on March 23 to the close on May 8 was also the biggest surge on record.
The economic pressure to reopen the U.S. economy remains intense. Hopefully more state governors will react positively to benefit their citizens, to reduce today’s personal hardships, especially as state unemployment funds continue to be depleted. Hopefully we will see an economic comeback in all 50 states; but that still depends on some defiant Governors. Can they bring themselves to choose economic recovery over worsening political divide in America?
What happened to America’s history of working together to overcome major obstacles? Why is the hatred of President Trump (by so many Democrats) more important than saving our economy from another “Great Depression”?