As the pandemic and response escalated last month, we left this blog with several crucial watch points for the weeks ahead. In the intervening period we’ve begun to receive some early answers to the queries we posed regarding the trajectory of the disease and the U.S. economy, although much remains uncertain.
The economic impact of the pandemic has been stark. With many businesses shuttered and workers forced to stay home, it will come as no surprise that the Astor Economic Index® (AEI) plunged to its lowest level since to Global Financial Crisis. The AEI is now at a level that has historically coincided with economic contraction.
Jobless claims track the weekly number of people filing for unemployment benefits and are one of the data points that quickest depict the economic impact of stay-at-home orders. It is hard to overstate the sheer magnitude of claims numbers, which have totaled over 16M in the past three weeks, and are consistent with an unemployment rate of approximately 14%. To give a sense of perspective, the record-shattering March 27, number of 6.8M was twice as large as claims of 3.3M from March 20, which in turn was about five times bigger than the previous record of 695,000 from 1982.
Much of the data released in the month of March, however, does not yet fully reflect the severity and scope of economic damage. The M/M non-farm payrolls number, for example, came in at a dismal -700,000, but details trends prior to the bulk of containment measures being put in place. Market PMI numbers, which come out in advance of the more widely reported ISM surveys, indicated sharp contraction in both manufacturing and services business activity and employment sub-components. The sobering reality is that it may be another two months before the data capture the true extent of the impact.
In trying to understand the near-term path of the U.S. macroeconomic outlook, we posed two questions last month: how long will containment be necessary given the spread of the virus, and how effective will government policy be at ameliorating the damage while the economy is in a state of suspended animation? On the latter point, recent actions have lent some clarity, with the policy response from both fiscal and monetary policy makers unprecedented in size and speed.
The Federal Reserve, in tandem with the Treasury, has provided implicit backstopping to almost every lending sector of the economy. A laundry list of Fed facilities have been rolled out over the past weeks, covering everything from student loans and municipal bonds to CLOs and mortgages. Although pressures in funding markets remain elevated, spreads on investment grade credit have begun to narrow, suggesting success in calming markets and encouraging credit to flow through the financial system.
On the fiscal front, Congress has rolled out a substantial $2 trillion package of aid to households who find themselves out of employment and businesses that are now empty of customers, and more support is likely to arrive. It will be some time before the impact of the fiscal stimulus is well understood, but it should go some ways towards helping businesses stay solvent and allow households to rejoin the labor force without an overhang of debt. Nonetheless, help has not come in time for all and is insufficient for some, and substantial damage has been done to the world economy. When we emerge from our current state, permanently closed business and lost jobs coupled with the new lack of fiscal space may affect the level of potential GDP and economic growth for some time.
Ultimately, the crucial question remains the same as it did last month: how fast will the disease be contained, and when can the world get back to work? Although a high degree of caution is due when extrapolating data points (particularly in the epidemiological field), there are early reasons for optimism. China is reopening for businesses, and the rate of growth in some of Europe (and recently, New York) has begun to slow, suggesting an earlier and lower peak than the more dire models. Yet even when the curve is truly on a downward path, the recovery may not begin in earnest for some time, as premature easing of containment measures risks a second wave of infections.
Astor’s methodology and approach have been battle tested in uncertain and even unprecedented times. Although this contraction has no real parallel in history, we believe that our framework remains highly relevant for analyzing the state of the U.S. economy, and we will continue to watch macroeconomic data closely to understand the depth, breadth and trajectory of the economic impact of COVID-19.
The Astor Economic Index® is a proprietary index created by Astor Investment Management L.L.C. It represents an aggregation of various economic data points and is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. It is not an investable product. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. All conclusions are those of Astor and are subject to change.
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