As segments of the national economy slowly re-open, often in incremental stages depending upon the COVID-19 impact within a state and the perceived risk profile (from a healthcare perspective) of that business, all eyes are affixed on the Depression Era-levels of unemployment that litter the U.S. landscape. The forced shutdowns in the past few months that effectively drove nearly 45 million Americans to file jobless claims has been acutely felt here in Michigan. As the chart below reflects, national unemployment climbed to approximately 14.7% in April before rebounding slightly to 13.3% in May as roughly 2.5 million workers re-entered the labor force last month. And while the 2.5 million re-entrants in May was welcomed news and robustly cheered by the markets, it pales in comparison to the nearly 21 million jobs slashed in April. Michigan saw its unemployment rate skyrocket to nearly 23% in April, with the hope that when state-level unemployment figures are released later this month they too will show the start of an improving picture:
It is clear that both national and global healthcare considerations and economic policy are working in tandem to try to flatten TWO
curves — the oft-publicized rate of infection of COVID-19, and the now-dramatically elevated unemployment rate. The Fed has slashed interest rates close to zero and is overseeing a new quantitative easing program, but monetary policy isn’t meant to encourage people to go out and buy items, so the Fed is also tapping its lending power capabilities with an alphabet-soup collection of programs. The notion of a “snap-back” in the economy depends on the course of the virus itself, which dictates how long segments of the economy will either remain in shutdown mode, or potentially return to lockdown status should a second or third wave of the virus return in the fall. Over this period, the economy needs to, at the very least, remain “functioning” and businesses need access to funding to survive the storm and effectively re-open in the future. It appears that no policy or set of policies can work unless the public health issue is resolved first, thereby enabling the U.S. economy to avoid an extended downturn.
And while Michigan, unfortunately, stands-out in terms of its relative level of joblessness vis-à-vis its neighbors in the Midwest, the carnage across the region has been no less devastating. Between March and April, six states each saw their employment numbers drop by more than 1 million workers: populous locales like California, Florida, New York, Pennsylvania, and Texas….and Michigan. Hopefully, with weekly jobless claims continuing their declining trend both across the nation and here in Michigan, the May state-by-state figures will also have begun the arduous task of moving lower. What is currently worrisome for most, is how much of the job losses are rooted in companies that may not survive the pandemic and/or reflect permanent structural changes within an economy adjusting to a post-pandemic new world order. When the Labor Department’s Bureau of Labor Statistics looks at alternative measures of unemployment, such as labor underutilization as measured by the U-6 (counting those outside the labor market but looking for work, as well as those who work part-time but would like to work full-time), the effective “rate” is painfully north of 20% across the country. And, as Fed Chairman Powell succinctly stated, it is possible that millions of workers will not or cannot go back to their old jobs due to changes brought on by the coronavirus. Collectively, and absent any kind of U-6 related adjustments, existing levels of unemployment across the Midwest are sobering:
As the market continues to advance following confirmation that the U.S fell into a recession in February (as officially declared by the National Bureau of Economic Research) after the longest economic expansion (128 months) on record, the 40+% valuation increases across most major indices has been nothing short of staggering in light of the economic (and healthcare) challenges that remain firmly on the horizon. It would seem that as Wall Street climbs its proverbial “Wall of Worry” (the periodic tendency of the market to overcome a variety of negative impediments and keep rising), investors appear to be of the mindset that these are temporary stumbling blocks that will be resolved at some point, and relatively near-term. Given the dramatic decline in market indices back in March, combined with the rapid shutdown in economic activity across broad swaths of the nation that at one point had more than 90% of the U.S. population under some form of shelter-in-place restrictions, it is probably not that surprising to folks that the initial rebound has also been both dramatic and swift.
Yet caution is warranted. The Fed has signaled that rates will remain near zero for an extended period of time (at least through the end of 2022), as they renewed economic forecasts that make clear their expectations of a lengthy economic recovery and a stubbornly-elevated unemployment rate still hovering near 10% at year-end. While that figure would reflect much-needed improvement from the current 13.3% rate, Powell was concise and direct in looking to temper market expectations: “I don’t view them (economic projections) as a dose of cold water, but rather a seemingly much needed dose of reality – that this is going to take time.” Thirty months from now, at year-end 2022, the Fed is projecting that national unemployment will have fallen to 5.5%, still well above the approximate 3.5% level in existence before the pandemic took hold and the economy came to an effective halt. But, with continued stated Fed support, potential additional stimulus programs coming out of Congress, and unknowns with regard to the course of the virus itself, it would seem that projections at the federal level are currently no more accurate than the projections many banks are currently formulating and re-working amidst all this uncertainty. I believe the fact that the country’s six largest banks set aside more than $25 billion for loan losses in recent Q1 results sums up the uncertainty all of us continue to manage, as the only consensus appears to be that no one really knows for sure how this crisis will ultimately play out.
As legendary investor, John Templeton, famously said: “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”
While the market tries to assess when it expects both COVID-19 will be contained and when consumer confidence will fully return, there exists no useful paradigm for the current coronavirus-induced crisis and its potential to trigger additional waves and lockdowns. At the moment, I take comfort in that both Congress and the Fed continue to be prepared and willing to “do whatever it takes” to implement constructive measures during this unprecedented time, and hopefully (ideally) such measures will be guided by fiscal responsibility in their execution.
In closing, attached please find our monthly summary of Michigan’s financial institutions. Enjoy the onset of wonderful weather and the opportunity to get outdoors during this somewhat surreal time. And again, this simple but heartfelt counsel: Be careful. Be smart. Stay healthy. Take care of your family, your colleagues, your community. Most important, be sure to take care of yourself.